2001 ANNUAL REPORT Dear Shareholder,      The year 2001 will long be remembered. From the tragic events of September, to the action of the Federal Reserve to cut interest rates eleven times, to the slow down in the economy, to the crisis in the local steel industry, and the stock market decline, the events of the last year were unprecedented.      2001 was also a year in which my banking industry peers provided me the honor of serving as Chairman of America’s Community Bankers, a national community bank trade association. ACB members, whose aggregate assets are more than $1 trillion, pursue progressive, entrepreneurial and service-oriented strategies in providing financial services to benefit their customers and communities.      My responsibilities as Chairman of America’s Community Bankers included the opportunity to travel our great nation and learn the best practices of community bankers as we use the resources entrusted to us to build our local economies. My duties included representing our industry in testimony before Congress, interaction with bank regulators as well as Federal Reserve policy makers, and participation in banking conferences both in the United States and abroad. Those experiences highlighted the enduring strength of the American spirit and our will to react vigorously to unforeseen challenges. David A. Bochnowski delivers the opening speech to the Annual Convention of America’s Community Bankers in New Orleans, Louisiana.		David and Ann Bochnowski journeyed to Tokyo for the 12th Special Seminar on International Finance, where he addressed the need for Congress to increase federal deposit insurance coverage of retirement accounts. They are shown with Sumio Kinoshita, president and CEO of Nikkin, The Japan Financial News co., Ltd. (the conference sponsor), and a delegate.

RESPONDING WITH

RECORD EARNINGS

IN 2001

BUILDING SHAREHOLDER

VALUE CONTINUES TO BE

OUR HIGHEST PRIORITY

Peoples Bank’s Web site provides information
about products, services and shareholder relations.

     The NorthWest Indiana Bancorp, and our subsidiary Peoples Bank, responded to the events of 2001 with a record performance.

•	Our earnings were $4.7 million and the assets grew 12.3% to $441 million.
•	Operating costs were up a modest 4.9%, while income from banking operations increased 20.4%.
•	Investment and trust services continued to grow with the book value of assets under management reaching $94.5 million at year-end.

     Our asset growth was fueled by an 8.9% increase in core accounts — checking, savings, money market and sweep accounts — and a 10.6% increase in certificates of deposit. Those funds were put to work in our local economy funding an 18.2% increase in residential loans and a 12.8% increase in commercial loans. Despite the impact of economic pressures on our customers, non-performing loans to total assets remained at a manageable level of 0.66%, with foreclosed real estate totaling $111 thousand.

     Building shareholder value continues to be our highest priority.

•	Our consistent strong earnings, asset quality, growth and $35.9 million of shareholder equity combine to provide a fair return to our shareholders.
•	Our stock price appreciated 6.25% in 2001 and during the year the Board of Directors increased our dividend 8.33% for a combined compound annual return to shareholders of 11.67%.

     Our commitment to shareholder value requires consistent investment that broadens our ability to provide quality service to our customers. This year everyone at the Bank participated in Service Plus and Sales Plus training, which improved our customer service skills as well as our individual ability to proactively inform customers about the features and benefits of our products and services. We adopted a Performance Management System that allows management to measure and reward the individual performance of each employee consistent with individual achievement of goals under our strategic business plan.

     Providing quality service to our customers also requires investment in delivery channels for our products and services. This year we rolled out a Web site providing information about products, services, and shareholder relations at www.peoplesbanksb.com.

Our expansion into the Hobart market completed the first full year of operation with branch growth running nearly three years ahead of projections.

     During the year we expanded our operations to include a Compliance Officer charged with the duty of ensuring our compliance with the myriad of federal and state banking regulations that guide our operations. This augments existing internal audit and loan review functions strengthening our ability to perform risk assessment of our banking operations.

     As we look to the coming year, our services will be enhanced by the introduction of Internet banking for our business and retail customers, along with the investment of $1 million in technology and technology upgrades. Operating efficiencies remain a strategic goal and compliment our belief that providing quality products and services at low cost builds lasting shareholder value. We plan to expand our presence in Munster with a new corporate facility which will alleviate the pressure of our growth over the last fifteen years and accommodate our future expansion.

     Our success in building shareholder value through consistent high performance relies on three critical components of our operating philosophy.

•	We care about our customers and know that customer loyalty begins with quality service that meets their individual needs.
•	We care about our staff and their professional and personal development and our ability to recognize their hard work.
•	We care about doing things right, so that our customers can rely on the accuracy of their bank statements and the public can rely on the integrity of our financial statements.

     The track record of performance we have built relies on the confidence of our shareholders in our strategic commitment to community banking. With your continued support, we will seek new horizons and opportunities to expand our presence as a thriving community bank, serving the needs of Northwest Indiana.

	Sincerely,
	David A. Bochnowski Chairman and Chief Executive Officer

Our Hobart branch growth is running nearly three years ahead of projections.

SEEKING NEW HORIZONS

AND OPPORTUNITIES

TO EXPAND

Selected Consolidated Financial Data

(In Thousands of Dollars, except Per Share Data)

(1)		Includes the $1.6 million one-time special assessment on FDIC-assessable deposits to recapitalize SAIF.
(2)		Six month period due to change in fiscal year end.
(3)		Data for six months ended December 31, 1993 has been annualized.

Business

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

     The Bancorp conducts business from its main office in Munster and its other seven full-service offices located in East Chicago, Hammond, Merrillville, Dyer, Schererville and Hobart, Indiana. The Bancorp is primarily engaged in the business of attracting deposits from the general public and the origination of loans secured by single family residences and commercial real estate, as well as, construction loans and various types of consumer loans and commercial business loans. In addition, the Bancorp’s trust department provides estate administration, estate planning, guardianships, land trusts, retirement planning, self-directed IRA and Keogh accounts, investment agency accounts, and serves as personal representative of estates and acts as trustee for revocable and irrevocable trusts.

     The Bancorp’s common stock is traded in the over-the-counter market and quoted in the National Quotation Bureau’s “Pink Sheets”. On February 28, 2002, the Bancorp had 2,729,110 shares of common stock outstanding and 523 stockholders of record. This does not reflect the number of persons or entities who may hold their stock in nominee or “street” name through brokerage firms.

Total assets have increased from $319.6 million at December 31, 1997 to $440.7
million at December 31, 2001. Growth during 2001 totaled $48.4 million or 12.3%.

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

General

     The Bancorp’s earnings are dependent upon the earnings of the Bank. The Bank’s earnings are primarily dependent upon net interest margin. The net interest margin is the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowings stated as a percentage of average total assets. The net interest margin is perhaps the clearest indicator of a financial institution’s ability to generate core earnings. Fees and service charges, trust department income, gains and losses from the sale of assets, provisions for loan losses, income taxes and operating expenses also affect the Bancorp’s profitability.

     A summary of our significant accounting policies is detailed in Note 1 to the Bancorp’s consolidated financial statements included in this report. The preparation of our financial statements requires management to make estimates and assumptions that affect our financial condition and operating results. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term as further information becomes available and future events occur.

     At December 31, 2001, the Bancorp had total assets of $440.7 million and total deposits of $355.2 million. The Bancorp’s deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund (SAIF) that is administered by the Federal Deposit Insurance Corporation (FDIC), an agency of the federal government. At December 31, 2001, stockholders’ equity totaled $35.9 million, with book value per share at $13.15. Net income for 2001 was $4.7 million, or $1.73 basic earnings per common share and $1.71 diluted earnings per common share. The return on average assets (ROA) was 1.15%, while the return on average stockholders’ equity (ROE) was 13.49%.

At December 31, 2001, the Bancorp had total assets of $440.7million.
Interest-earning assets totaled $413.0 million and represented 93.7%
of total assets.

Asset/Liability Management and Market Risk

     Asset/liability management involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities as well as to assure adequate liquidity. These strategies determine the characteristics and mix of the balance sheet. They affect the interest margins, maturity patterns, interest rate sensitivity and risk, as well as resource allocation. For the Bancorp, the key components of asset/liability management are loans, investments, deposits and borrowed funds. Over the years, the Bancorp has directed its lending efforts toward construction loans, adjustable rate residential loans, equity lines of credit, adjustable rate commercial real estate loans and commercial business loans tied to the prime rate of interest. Consumer loans are generally made for terms of five years or less. Fixed rate residential real estate loans are generally made for contractual terms of twenty years or less. The actual cash flows from these loans generally results in a duration which is less than the contractual maturity, providing protection against the possibility of rising interest rates.

     The Bancorp is primarily a portfolio lender. Mortgage banking activities are limited to the sale of fixed rate mortgage loans with contractual maturities of twenty-five years or longer. These loans are sold, on a case-by-case basis, in the secondary market as part of the Bancorp’s efforts to manage interest rate risk. The Bancorp retains the servicing on all loans sold in the secondary market.

     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 and federal agency obligations. Investments are generally for terms ranging from one day to seven years. Interest-bearing balances in financial institutions include overnight deposits at the Federal Home Loan Bank of Indianapolis (FHLB). Securities are classified as either held-to-maturity or available-for-sale. Held-to-maturity securities are those that the Bancorp has the positive intent and ability to hold to maturity. Available-for-sale securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. The Bancorp does not have a trading portfolio. During 2001, the Bancorp did not have derivative instruments and was not involved in hedging activities as defined by SFAS 133.

     The Bancorp’s cost of funds reacts rapidly to changes in market interest rates due to the relatively short-term nature of its deposit liabilities. Consequently, the levels of short-term interest rates have influenced the Bancorp’s results of operations. In order to reduce exposure to interest-rate risk, core deposits (checking, NOW accounts, savings and money market accounts) have been aggressively marketed and certificate accounts have been competitively priced. Account activity and maturities are monitored in order to guard

against the outflow of funds. Borrowed money is used to compensate for reductions in the availability of other sources of funds and is generally accomplished through repurchase agreements, as well as, through a line of credit and advances from the FHLB. FHLB advances with maturities ranging from one to ten years are used to fund securities and loans of comparable duration, as well as, to reduce the impact that movements in short-term interest rates have on the Bancorp’s overall cost of funds. The Bancorp does not obtain funds through brokers.

     The Bancorp’s primary market risk exposure is interest rate risk. Interest rate risk is the risk that the Bancorp’s earnings and capital will be adversely affected by changes in interest rates. The primary approach to interest rate risk management is one that focuses on adjustments to the Bancorp’s asset/liability mix in order to limit the magnitude of interest rate risk. The Board of Directors has delegated the responsibility for measuring, monitoring and controlling interest rate risk to the Bancorp’s asset/liability management committee (ALCO). The ALCO is responsible for developing and implementing interest rate risk management strategies, establishing and maintaining a system of limits and controls, and establishing and utilizing an interest rate risk measurement system. The ALCO, which is made up of members of senior management, generally meets monthly with board presentations occurring quarterly.

     Performance from an interest rate risk perspective can be measured in many ways. Methodologies used by the Bancorp focus on net interest income and the net economic value of equity. Net interest income is defined as interest income less interest expense. Variability in net interest income arises because its components - interest income and interest expense — do not change equally as rates vary. This mismatch occurs because individual assets and liabilities reprice differently as rates change. Factors which affect net interest income include changes in the level of interest rates, changes in the relationship between Bancorp yield rates and interest costs, changes in the volume of assets and liabilities outstanding, and changes in the composition or mix of assets and liabilities. Management uses rate shock (i.e., instantaneous and sustained parallel shifts in the yield curve in 1% increments up and down 2%) for stress testing the net interest income under several rate change levels. In order to simulate activity, maturing balances are replaced with new balances at the new rate level and repricing balances are adjusted to the new rate shock level. The results are compared to limits set by the Board of Directors and are monitored to identify unfavorable trends.

     Net economic value of equity is the net present value of the Bancorp’s portfolio of assets and liabilities. By marking-to-market the components of the balance sheet, management can compute the net economic value of equity. As rates change over time, the market values of Bancorp assets and liabilities will change, with longer-term products fluctuating more than short-term products. In most cases, rate-sensitive assets and liabilities will not have the same maturity characteristics. Therefore, as rates vary, the market value of the rate-sensitive assets will not change equally with the market value of rate-sensitive liabilities. This will cause the net economic value of equity to vary. The focus of the net economic value of equity is to determine the percentage decline in the net economic value of equity caused by a 2% increase or decrease in interest rates, whichever produces the larger decline. A large value indicates a large percentage decline in the net economic value of equity due to changes in interest rates and, thus, high interest rate sensitivity. A low value indicates a small percentage decline in the net economic value of equity due to changes in interest rates and, thus, low interest rate sensitivity. As with net interest income, the results are compared to limits set by the Board of Directors and are monitored to identify unfavorable trends.

     Presented in the following tables is forward-looking information about the Bancorp’s sensitivity to changes in interest rates as of December 31, 2001 and 2000. The tables incorporate the Bancorp’s internal system generated data as related to the maturity and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. Prepayment assumptions are based on published data. Present value calculations use current published market interest rates. For core deposits that have no contractual maturity, the table presents principal cash flows and, as applicable, related weighted-average interest rates based on the Bancorp’s historical experience, management’s judgment, and statistical analysis, as applicable, concerning their most likely withdrawal behaviors, but not as to when they could be repriced.

Interest Rate Risk at December 31, 2001

Interest Rate Risk at December 31, 2000

     The tables show that the Bancorp has managed interest rate risk within the policy limits set by the Board of Directors. At December 31, 2001, an increase in interest rates of 2% would have resulted in a 7.8% decrease in net interest income and a 19.5% decrease in the net economic value of equity compared to decreases of 6.5% and 11.9%,

at December 31, 2000. The increase in interest rate risk at December 31, 2001 was due to a reduction in overnight investments and increased short-term borrowings at year-end, as loan demand increased during the fourth quarter of 2001.

Financial Condition

     During the year ended December 31, 2001, total assets increased by $48.4 million (12.3%), with interest-earning assets increasing by $44.9 million (12.2%). At December 31, 2001, interest-earning assets totaled $413.1 million and represented 93.7% of total assets. Loans totaled $342.6 million and represented 82.9% of interest-earning assets, 77.7% of total assets and 96.5% 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 growth, product diversification, and competitive and profitable pricing. The loan portfolio includes $12.7 million (3.7%) in construction and land development loans, $190.4 (55.6%) in residential real estate loans, $91.4 million (26.7%) in commercial and multifamily real estate loans, $9.9 million (2.9%) in consumer loans and $38.2 million (11.1%) in commercial business and other loans. During 2001, loans increased by $16.4 million (5.0%), with increases taking place in residential real estate loans and commercial business loans. Adjustable rate loans comprised 46% of total loans at year-end. Growth during the first nine months of 2001 was slow due to expected loan pay-offs in the commercial loan portfolio, an increase in refinancing activity and prepayments due to declining interest rates, and the sale of fixed rate residential mortgage loans from current production. Loan growth during the fourth quarter was strong despite the economic slowdown and management believes that the positive trend in loan growth will continue during 2002 because of a lower interest rate environment and an aggressive marketing and call program effort. Management expects to fund loan growth with a mix of core deposits and borrowed funds.

Total loans have increased from $272.2 million at December 31, 1997
to $342.6 million at December 31, 2001. During 2001, loans increased
by $16.4 million or 5.0%.

     During 2001, the Bancorp sold $4.7 million in fixed rate mortgages compared to $795 thousand in 2000 and $2.5 million in 1999. All loans sold had contractual maturities exceeding twenty-five years. Net gains realized from the sales totaled $64 thousand, $34 thousand and $30 thousand for 2001, 2000 and 1999. Net mortgage loan servicing income totaled $4 thousand for 2001, compared to $15 thousand for 2000, and $16 thousand for 1999. At December 31, 2001, the Bancorp had $807 thousand classified as loans held for sale. During 2002, the Bancorp expects to continue selling fixed rate mortgage loans, with contractual maturities of twenty-five years or longer, on a case-by-case basis as part of its efforts to manage interest rate risk.

At December 31, 2001, loans receivable totaled $342.6 million and
represented 83.0% of interest-earning assets.

     At December 31, 2001, non-performing loans, which include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status, totaled $2.9 million, an increase of $1.1 million from the prior year. The ratio of non-performing loans to total assets was 0.66% at December 31, 2001, compared to 0.46% at December 31, 2000. The December 31, 2001 balance includes $2.5 million in loans accounted for on a non-accrual basis and $415 thousand in accruing loans which were contractually past due 90 days or more. At December 31, 2001, $2.9 million of the Bancorp’s loans were internally classified as substandard, equaling the $2.9 million reported at December 31, 2000. There were no loans classified as doubtful or loss. Substandard loans include non-performing loans and potential problem loans, where information about possible credit problems or other conditions causes management to question the ability of such borrowers to comply with loan repayment terms.

     The balances for non-performing and substandard loans consists largely of three loans totaling $1.53 million to a company, and its guarantors, that specializes in heavy hauling, trucking and excavating. Two of the loans, totaling $1.46 million, have been classified as impaired. Impaired loans are loans where full payment under the loan terms is not expected. No other loans were considered to be impaired loans as of, or for the twelve months ended December 31, 2001.

     At December 31, 2001, management of the Bancorp is of the opinion that there are no loans, except those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonaccrual, past due or restructured loans. Also, at December 31, 2001, there are no other interest bearing assets that would be required to be disclosed as nonaccrual, past due, restructured or potential problem if such assets were loans. Management does not anticipate that any of the non-performing loans or classified loans would materially impact future operations, liquidity or capital resources.

     Because some loans may not be repaid in accordance with contractual agreements, an allowance for loan losses (ALL) has been maintained. While management may periodically allocate portions of the allowance for specific problem loans, the entire allowance is available to absorb all credit losses that arise from the loan portfolio and is not segregated for, or allocated to, any particular loan or group of loans. During 2001, additions to the ALL account totaled $230 thousand compared to $175 thousand for 2000 and $200 thousand for 1999. The provision is based on management’s current judgments about the credit quality of the loan portfolio, loan portfolio growth, changes in the portfolio mix and local economic conditions. While the quality of the loan portfolio remains sound, provisions during 2001 were warranted because of increased average daily loan balances, apparent weaknesses in the local economy, the inherent risk associated with growth in commercial real estate and commercial business loans, and an increase in the level of charge-offs. Charge-offs, net of recoveries, totaled $396 thousand during 2001, compared to $162 thousand for 2000 and $23 thousand for 1999. The appropriateness of the current year provision and the overall adequacy of the ALL were determined through a disciplined and consistently applied quarterly process that combines a review of current activity with a risk assessment worksheet.

     At December 31, 2001, the ALL to total loans was 0.92% compared to 1.02% at December 31, 2000, while the ALL to non-performing loans (coverage ratio) was 108.6% compared to 183.5% for the same periods. The December 31, 2001 balance in the ALL account of $3.2 million is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions.

     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, as well as, 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 general reserves to all non-performing loans based on current information available. During 2001, additions to the ALL were allocated to commercial business loans due to the increase in non-performing balances resulting from two impaired loans and growth in this product area.

At December 31, 2001, the Bancorp had $3.2 million in the Allowance for
Loan Losses account. The amount represents 0.92% of loans outstanding
and 108.64% of non-performing loans.

     At December 31, 2001, the Bancorp’s investment portfolio totaled $67.3 million and was invested as follows: 73.0% in U.S. government agency debt securities, 1.2% in U.S. government debt securities, and 25.8% in U.S. government agency mortgage-backed securities and collateralized mortgage obligations. At December 31, 2001, securities available-for-sale totaled $64.0 million or 95.1% 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 December 31, 2001, the Bancorp had $144 thousand in federal funds sold, and $2.2 million in FHLB stock. During 2001, falling interest rates and volatility in financial markets resulted in strong deposit growth, as well as, increases in loan prepayments and refinancing activity. As cash inflows outpaced loan production during the first nine months, funds were invested in securities causing the investment portfolio to increase by $31.1 million (86.0%).

Deposits are the major source of funds for lending and other investment
purposes. During 2001, deposits increased by $30.9 million or 9.5%.

     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 December 31, 2001, deposits totaled $355.2 million. During 2001, deposit growth totaled $30.9 million (9.5%). NOW accounts increased $3.2 million (8.3%), checking accounts increased $4.3 million (15.3%), money market deposit accounts (MMDA’s) increased $750 thousand (1.7%), savings accounts increased $4.9 million (10.8%), and certificates of deposit increased by $17.6 million (10.6%). At December 31, 2001, the deposit base was comprised of 14.2% savings accounts, 12.9% MMDAs, 12.0% NOW accounts, 9.2% checking accounts and 51.7% certificates of deposit. The growth in deposits was a result of competitive product offerings, an aggressive marketing program, and volatility in the financial markets.

     Borrowings are primarily used to fund asset growth not supported by deposit generation. At December 31, 2001, borrowed funds totaled $45.0 million compared to $30.6 million at December 31, 2000, an increase of $14.4 million (47.0%). Repurchase agreements totaled $15.6 million compared to $11.9 million at December 31, 2000, an increase of $3.7 million (31.1%). FHLB advances totaled $17.0 million, increasing $5.5 million, as the Bancorp extended the maturity structure of interest-bearing liabilities at cost effective interest rates. Other short-term borrowings totaled $12.4 million compared to $7.2 million at December 31, 2000, an increase of $5.2 million to meet short-term funding requirements.

Liquidity and Capital Resources

     For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet savings deposit withdrawals, and pay dividends and operating expenses. The Bancorp’s primary goal for liquidity management is to ensure that at all times it can meet the cash demands of its depositors and its loan customers. A secondary purpose of liquidity management is profit management. Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bancorp’s net interest margin by making adequate, but not excessive, liquidity provisions. Finally, because the Bancorp is subject to legal reserve requirements under Federal Reserve Regulation D, liquidity is managed to ensure that the Bancorp maintains an adequate level of legal reserves.

     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 and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements and advances from the FHLB) as a source of funds.

Management firmly believes that the safety and soundness of the Bancorp
is enhanced by maintaining a high level of capital. At December 31, 2001,
the Bancorp’s capital exceeded all regulatory requirements. The Bancorp is
categorized as “well capitalized”. The ratio of Tier 1 capital to adjusted
average assets reflects the change in capital over the periods presented as a
result of profitability and success in managing growth. In addition, Tier 1
capital to risk-weighted assets was 12.5% and total capital to risk-weighted
assets was 13.6%.

     During 2001, cash and cash equivalents decreased $483 thousand, compared to an increase of $2.8 million for 2000 and a decrease of $12.7 million for 1999. The decrease for 2001 reflects the increase in securities and loans receivable. During 2001, the primary sources of cash and cash equivalents were deposit growth, proceeds from the maturities and sales of securities, loan prepayments, borrowed funds, and cash provided by operating activities. The primary uses of cash and cash equivalents were the purchase of securities, loan originations, and the payment of common stock dividends. During 2001, cash provided by operating activities totaled $5.6 million, compared to $5.3 million for 2000 and $5.1 million for 1999. The primary source of the increase during 2001 was the increase in net income. Cash outflows

for investing activities totaled $48.9 million during 2001, compared to $28.7 million for 2000 and $29.8 million for 1999. The increase during 2001 reflects loan growth and purchases of securities. The net change in loans receivable and loan participations purchased totaled $17.4 million during 2001, compared to $30.6 million for 2000 and $22.6 million for 1999. Cash flows from financing activities totaled $42.7 million during 2001, compared to $26.2 million for 2000 and $12.0 million for 1999. The increase during 2001 reflects deposit growth and increased borrowings. Deposit growth during 2001 totaled $30.9 million, compared to $17.7 million for 2000 and $13.4 million for 1999. The increase in FHLB advances and other borrowed funds totaled $14.4 million during 2001, compared to $12.0 million during 2000 and $1.3 million for 1999. During 2001, the Bancorp used low cost advances to extend the maturity structure of interest-bearing liabilities and utilized its line of credit for short-term funding. The Bancorp paid dividends on common stock of $2.8 million during 2001, compared to $2.5 million for 2000 and $2.3 million for 1999.

     At December 31, 2001, outstanding commitments to fund loans totaled $63.0 million. Approximately 77% of the commitments were at variable rates. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and to maintain proper levels of liquidity.

     Management strongly believes that safety and soundness is enhanced by maintaining a high level of capital. During 2001, stockholders’ equity increased by $2.4 million (7.0%). The increase resulted primarily from earnings of $4.7 million for 2001. In addition, $223 thousand represents proceeds from the exercise of 22,960 stock options. The Bancorp declared $2.8 million in cash dividends. The net unrealized gain on available-for-sale securities, net of tax, was $254 thousand. At December 31, 2001, book value per share was $13.15 compared to $12.39 at December 31, 2000.

     The Bancorp is subject to risk-based capital guidelines adopted by the Board of Governors of the Federal Reserve System (the FRB), and the Bancorp is subject to risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements are substantially the same. These regulations divide capital into two tiers. The first tier (Tier 1) includes common equity, certain non-cumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. Supplementary (Tier 2) capital includes, among other things, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan losses, subject to certain limitations, less required deductions. 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 experiencing 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 December 31, 2001, the Bancorp’s capital exceeded all regulatory capital requirements. At December 31, 2001, the Bancorp’s and the Bank’s regulatory capital ratios were substantially the same. The dollar amounts are in millions.

Results of Operations — Comparison of 2001 to 2000

     Net income for 2001 was $4.7 million, compared to $4.4 million for 2000, an increase of $339 thousand (7.8%). The earnings represent a return on average assets of 1.15% for 2001 compared to 1.17% for 2000. The return on average equity was 13.49% for 2001 compared to 13.30% for 2000.

     Net interest income for 2001 was $15.2 million, up $512 thousand (3.5%) from $14.7 million for 2000. The increase in net interest income was due to growth in average daily balances for interest earning assets. During 2001, the Federal Reserve Board cut interest rates 11 times for a total of 425 basis points, bringing the Fed Funds rate to 1.75%, its lowest level in 40 years. The Fed’s aggressive easing was in response to weakening national economy. The actions of the Federal Reserve Board resulted in significant repricing for both interest-earning assets and interest-bearing liabilities. Falling rates resulted in lower yields for investments and loans as securities were called, while loans either repriced or refinanced at lower rates. Yields fell faster than the cost of funds for most of the year as deposit rates lagged market decreases because of competitive pressures, the maturity structure of the Bancorp’s certificates of deposit, and the existing low rates on core accounts. The weighted-average yield on interest-earning assets was 7.29% for 2001 compared to 7.88% for 2000. The weighted-average cost of funds was 3.55% for 2001 compared to 3.95% for 2000. The impact of the 7.29% return on interest-earning assets and the 3.55% cost of funds resulted in a net interest spread of 3.74% for 2001 compared to 3.93% for 2000. During 2001, total interest income increased by $348 thousand (1.2%) while total interest expense decreased by $164 thousand (1.2%). The net interest margin was 3.70% for 2001 compared to 3.92% for 2000.

     During 2001, interest income from loans decreased by $392 thousand (1.5%) compared to 2000. The decrease was due to increased prepayment activity and lower yields as rates for new originations and refinances fell throughout the year. The weighted-average yield on loans outstanding was 7.72% for 2001 compared to 8.11% for 2000. Loan balances averaged $325.9 million for 2001, up $11.0 million (3.5%) from $314.9 million for 2000. During 2001, interest income from securities and other interest earning assets increased by $740 thousand (29.3%) compared to 2000. The increase was due to higher average daily balances. The weighted-average yield on securities and other interest earning assets was 5.12% for 2001 compared to 6.11% for 2000. Securities and other interest earning assets averaged $63.8 million for 2001, up $22.5 million (54.5%) from $41.3 million for 2000.

The net interest margin is total interest income minus total interest
expense stated as a percentage of average total assets. During 2001, the
decrease was primarily due to a lower interest rate environment.

     Interest expense for deposits decreased by $302 thousand (2.5%) during 2001 compared to 2000. The decrease was due to a lower cost of funds. The weighted-average rate paid on deposits for 2001 was 3.45% compared to 3.83% for 2000. The lower cost of funds reflects a falling interest rate environment. Total deposit balances averaged $340.9 million for 2001, up $26.4 million (8.4%) from $314.5 million for 2000. Interest expense on borrowed funds increased by $138 thousand (10.3%) during 2001 due to increases in average daily balances. The weighted-average cost of borrowed funds was 4.72% for 2001 compared to 5.55% for 2000. Borrowed funds averaged $31.2 million during 2001, up $7.1 million (29.5%) from $24.1 million for 2000 due to favorable interest rates. Borrowed funds have provided a cost-effective supplement to deposits for funding interest-earning asset growth.

     Noninterest income was $2.4 million for 2001, up $407 thousand (20.4%) from $2.0 million during 2000. During 2001, fees and service charges increased $150 thousand (9.5%) and income from Trust operations increased $36 thousand (9.3%) compared to 2000. During 2001, the Bancorp reported $64 thousand in gains on sales of loans compared to $34 thousand for 2000. Gains on securities totaled $142 thousand during 2001, as falling interest rates enabled the Bancorp to sell securities with expected calls. In addition, the Bancorp reported $12 thousand in gains on sale of foreclosed real estate. No security gains or foreclosed real estate gains were reported during 2000.

     Noninterest expense for 2001 was $9.9 million, up $462 thousand (4.9%) from $9.4 million for 2000. During 2001, management implemented initiatives focused on limiting the increase of noninterest expenses from Bancorp operations. The increase in compensation and benefits was due to annual salary increases and additional staffing for current operations resulting from the Hobart facility that opened during the fourth quarter of 2000. Other expense changes were due to standard increases in operations and the new Hobart facility. The Bancorp’s efficiency ratio for 2001 was 56.3% compared to 56.6% for 2000. The ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

     Income tax expenses for 2001 totaled $2.8 million compared to $2.7 million for 2000, an increase of $63 thousand (2.3%). The increase was due to increased earnings. The combined effective federal and state tax rates for the Bancorp were 36.9% for 2001 and 38.1% for 2000. The reduction during 2001 was a result of investments in low-income housing tax credits.

The efficiency ratio measures how much of the Bancorp’s revenue is consumed
by operating costs. The efficiency ratio is determined by dividing
total noninterest expense by the sum of net interest income and total noninterest
income for the period. At December 31, 2001, the Bancorp’s efficiency ratio was 56.3%.

Results of Operations — Comparison of 2000 to 1999

     Net income for 2000 was $4.4 million, compared to $4.2 million for 1999, an increase of $135 thousand (3.2%). The earnings represent a return on average assets of 1.17% for 2000 compared to 1.20% for 1999. The return on average equity was 13.30% for 2000 compared to 13.17% for 1999.

     Net interest income for 2000 was $14.7 million, up $365 thousand (2.5%) from $14.3 million for 1999. The increase in net interest income was due to higher yields on interest-earning assets and growth in average daily balances for loans. The weighted-average yield on interest-earning assets was 7.88% for 2000 compared to 7.61% for 1999. The weighted-average cost of funds was 3.95% for 2000 compared to 3.54% for 1999. The impact of the 7.88% return on interest-earning assets and the 3.95% cost of funds resulted in a net interest spread of 3.93% for 2000 compared to 4.07% for 1999. During 2000, total interest income increased by $2.5 million (9.6%) while total interest expense increased by $2.1 million (18.7%). The net interest margin was 3.92% for 2000 compared to 4.04% for 1999.

     During 2000, interest income from loans increased by $2.9 million (12.8%) compared to 1999. The increase was due to higher yields and higher average daily balances for the loan portfolio. The weighted-average yield on loans outstanding was 8.11% for 2000 compared to 7.90% for 1999. Loan balances averaged $314.9 million for 2000, up $28.3 million (9.9%) from $286.6 million for 1999. During 2000, interest income from securities and other interest earning assets decreased by $431 thousand (14.6%) compared to 1999. The decrease was due to lower average daily balances. The weighted-average yield on securities and other interest earning assets was 6.11% for 2000 compared to 5.92% for 1999. Securities and other interest earning assets averaged $41.3 million for 2000, down $8.6 million (17.2%) from $49.9 million for 1999.

     Interest expense for deposits increased by $1.7 million (16.3%) during 2000 compared to 1999. The increase was due to a higher cost of funds and growth in average daily balances. The weighted-average rate paid on deposits for 2000 was 3.83% compared to 3.45% for 1999. The higher cost of funds reflected a rising interest rate environment. Total deposit balances averaged $314.5 million for 2000, up $14.1 million (4.7%) from $300.4 million for 1999. Interest expense on borrowed funds increased by $413 thousand (44.7%) during 2000 due to higher rates and increases in average daily balances. The weighted-average cost of borrowed funds was 5.55% for 2000 compared to 5.11% for 1999. Borrowed funds averaged $24.1 million during 2000, up $6.0 million (33.1%) from $18.1 million for 1999. Borrowed funds provided a cost-effective supplement to certificates of deposit, as deposit pricing within the Bancorp’s local market area was very competitive.

     Noninterest income was $2.0 million for 2000, up $336 thousand (20.3%) from $1.7 million during 1999. During 2000, management continued to implement initiatives focused on improving noninterest income from Bancorp operations. As a result, fees and service charges increased $312 thousand (24.8%) and income from Trust operations increased $49 thousand (14.5%) compared to 1999.

     Noninterest expense for 2000 was $9.4 million, up $675 thousand (7.7%) from $8.8 million for 1999. The increase in compensation and benefits was due to additional staffing, annual salary increases and the increased cost of employee benefits. The increase in marketing was due to an aggressive direct mail program focused on loan, deposit and trust products. Other expense changes were due to standard increases in operations. The Bancorp’s efficiency ratio for 2000 was 56.6% compared to 54.9% for 1999.

     Income tax expenses for 2000 totaled $2.7 million compared to $2.8 million for 1999, a decrease of $84 thousand (3.0%). The reduction during 2000 was a result of investments in low-income housing tax credits. The combined effective federal and state tax rates for the Bancorp were 38.1% for 2000 and 39.6% for 1999.

Impact of Inflation and Changing Prices

     The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Bancorp are monetary in nature. As a result, interest rates have a more significant impact on the Bancorp’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services.

Forward-Looking Statements

     This document (including information incorporated by reference) contains, and future oral and written statements of the Bancorp and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Bancorp. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Bancorp’s management and or information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Bancorp undertakes no obligation to update any statement in light of new information or future events.

     The Bancorp’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Bancorp and its subsidiaries include, but are not limited to, the following:

     •     The strength of the United States economy in general and the strength of the local economies in which the Bancorp conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Bancorp’s assets.

     •     The economic impact of the terrorist attacks that occurred on September 11th, as well as any future threats and attacks, and the response of the United States to any such threats and attacks.

     •     The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.

     •     The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Bancorp’s assets) and the policies of the Board of Governors of the Federal Reserve System.

     •     The ability of the Bancorp to compete with other financial institutions as effectively as the Bancorp currently intends due to increases in competitive pressures in the financial services sector.

     •     The inability of the Bancorp to obtain new customers and to retain existing customers.

     •     The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

     •     Technological changes implemented by the Bancorp and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Bancorp and its customers.

     •     The ability of the Bancorp to develop and maintain secure and reliable electronic systems.

     •     The ability of the Bancorp to retain key executives and employees and the difficulty that the Bancorp may experience in replacing key executives and employees in an effective manner.

     •     Consumer spending and saving habits which may change in a manner that affects the Bancorp’s business adversely.

     •     Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.

     •     The costs, effects and outcomes of existing or future litigation.

     •     Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

     •     The ability of the Bancorp to manage the risks associated with the foregoing as well as anticipated.

     These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Bancorp and its business, including other factors that could materially affect the Bancorp’s financial results, is included in the Bancorp’s filings with the Securities and Exchange Commission.

Return on assets (ROA) indicates the overall operating efficiency of a
company. The ratio is determined by stating net income as a percentage of average total assets.

Return on equity (ROE) is determined by stating net income as a percentage
of average stockholders’ equity. The ratio is important to the Bancorp’s
stockholders because it measures the return on their invested capital.
The increase in ROE for 2001 reflects record earnings.

Report of Independent Auditors

Board of Directors and Stockholders
NorthWest Indiana Bancorp
Munster, Indiana

We have audited the accompanying consolidated balance sheets of NorthWest Indiana Bancorp (the Bancorp) as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Bancorp’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NorthWest Indiana Bancorp as of December 31, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

	Crowe, Chizek and Company LLP

South Bend, Indiana
January 7, 2002

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

Consolidated Statements of Income