NorthWest Indiana Bancorp 10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006


o		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 (State or other jurisdiction of incorporation or organization)		35-1927981 (I.R.S. Employer Identification No.)


9204 Columbia Avenue Munster, Indiana (Address of principal executive offices)		46321 (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

Large accelerated filer: o Accelerated filer: o Non-Accelerated filer: þ

Based on the average bid and ask prices for the registrant’s Common Stock at June 30, 2006, at that date, the aggregate market value of the registrant’s Common Stock held by nonaffiliates of the registrant (assuming solely for the purposes of this calculation that all directors and executive officers of the registrant are “affiliates”) was $67,279,475.

There were 2,801,265 shares of the registrant’s Common Stock, without par value, outstanding at February 23, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents have been incorporated by reference into this Annual Report on Form 10-K:

1. 2006 Annual Report to Shareholders. (Part II)

2. Definitive Proxy Statement for the 2007 Annual Meeting of Shareholders. (Part III)

TABLE OF CONTENTS


PART I
	Item 1. Business
	Item 1A. Risk Factors
	Item 1B. Unresolved Staff Comments
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 4.5 Executive Officers of the Bancorp
PART II
	Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
	Item 9B. Other Information
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
PART IV
	Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
EX-10.5
EX-10.8
EX-10.12
EX-13
EX-21
EX-23
EX-31.1
EX-31.2
EX-32

PART I

Item 1. Business

General

NorthWest Indiana Bancorp, an Indiana corporation (the “Bancorp”), was incorporated on January 31, 1994, and is the holding company for Peoples Bank SB, an Indiana savings bank (the “Bank”). The 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 and the Bank’s wholly owned subsidiaries.

The Bank is primarily engaged in the business of attracting deposits from the general public and the origination of loans, mostly upon the security of single family residences and commercial real estate, as well as, construction loans and various types of consumer loans and commercial business loans, within its primary market area of Lake County, in northwest Indiana. In addition, the Bancorp’s Wealth Management Group provides estate and retirement planning, guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts, investment agency accounts, and serves as the personal representative of estates and acts as trustee for revocable and irrevocable trusts.

The Bank’s deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (“DIF”), which is administered by the Federal Deposit Insurance Corporation (“FDIC”), an agency of the federal government. As the holding company for the Bank, the Bancorp is subject to comprehensive examination, supervision and regulation by the Board of Governors of the Federal Reserve System (“FRB”), while the Bank is subject to comprehensive examination, supervision and regulation by both the FDIC and the Indiana Department of Financial Institutions (“DFI”). The Bank is also subject to regulation by the FRB governing reserves required to be maintained against certain deposits and other matters. The Bank is also a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis, which is one of the twelve regional banks comprising the system of Federal Home Loan Banks.

The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of its eight branch locations. For further information, see “Properties.”

Forward-Looking Statements

Statements contained in this filing on Form 10-K 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 a number of factors, including those identified in Item 1A of this Form 10-K.

Lending Activities

General. The Bancorp’s product offerings include residential mortgage loans, construction loans, commercial real estate loans, consumer loans and commercial business loans. The Bancorp’s lending strategy stresses quality growth, product diversification and, competitive and profitable pricing. While lending efforts include both fixed and adjustable rate products, the focus has been on products with adjustable rates and/or shorter terms to maturity. It is management’s goal that all programs are marketed effectively to our primary market area.

The Bancorp is primarily a portfolio lender. Mortgage banking activities are limited to the sale of fixed rate mortgage loans with contractual maturities generally exceeding fifteen years. 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. All loan sales are made to Freddie Mac. All loans held for sale are recorded at the lower of cost or market value.

Under Indiana Law, an Indiana stock savings bank generally may not make any loan to a borrower or its related entities if the total of all such loans by the savings bank exceeds 15% of its unimpaired capital and unimpaired surplus (plus up to an additional 10% of unimpaired capital and unimpaired surplus, in the case of loans fully collateralized by readily marketable collateral); provided, however, that certain specified types of loans are exempted from these limitations or subject to different limitations. The maximum amount that the Bank could have loaned to one borrower and the borrower’s related entities at December 31, 2006, under the 15% of capital and surplus limitation was approximately $7,938,000. At December 31, 2006, the Bank had no loans that exceeded the regulatory limitations.

At December 31, 2006, there were no concentrations of loans in any type of industry that exceeded 10% of total loans that were not otherwise disclosed as a loan category.

Loan Portfolio. The following table sets forth selected data relating to the composition of the Bancorp’s loan portfolio by type of loan and type of collateral at the end of each of the last five years. The amounts are stated in thousands (000’s).


	2006		2005		2004		2003		2002
Type of loan:
Conventional real estate loans:
Construction and development loans	$	48,688	$	47,957	$	38,619	$	23,674	$	13,449
Loans on existing properties (1)		361,011		347,542		331,378		339,461		320,426
Consumer loans		3,012		3,983		4,685		5,099		6,293
Commercial business		46,751		50,069		47,270		35,767		39,009
Government and other (2)		12,254		19,492		11,838		5,807		1,251

Loans receivable (3)	$	471,716	$	469,043	$	433,790	$	409,808	$	380,428

Type of collateral:
Real estate:
1-to-4 family	$	232,271	$	228,475	$	226,695	$	233,454	$	222,620
Other dwelling units, land and commercial real estate		177,427		167,023		143,302		129,680		111,255
Consumer loans		2,904		3,966		4,559		4,909		6,102
Commercial business		45,671		49,044		44,923		34,554		37,477
Government and other (2)		12,254		19,492		11,838		5,807		1,251

Loans receivable (4)	$	470,527	$	468,000	$	431,317	$	408,404	$	378,705


Average loans outstanding during the period (3)	$	472,212	$	443,523	$	415,098	$	394,955	$	365,632


(1)		Includes residential and commercial construction loans converted to permanent term loans and commercial real estate loans.

(2)		Includes overdrafts to deposit accounts.

(3)		Net of unearned income and deferred loan fees.

(4)		Net of unearned income and deferred loan fees. Does not include unsecured loans.

Loan Originations, Purchases and Sales. Set forth on the following table loan originations, purchases and sales activity for each of the last three years are shown. The amounts are stated in thousands (000’s).


	2006		2005		2004
Loans originated:
Conventional real estate loans:

Construction and development loans	$	11,212	$	14,471	$	22,845
Loans on existing property		46,713		55,685		48,678
Loans refinanced		9,853		7,461		12,920

Total conventional real estate loans originated		67,778		77,617		84,443
Commercial business loans		123,829		148,433		114,685
Consumer loans		3,197		3,516		4,124

Total loans originated	$	194,804	$	229,566	$	203,252


Loan participations purchased	$	12,354	$	23,121	$	17,756

Whole loans and participations sold	$	9,142	$	5,538	$	16,100

Loan Maturity Schedule. The following table sets forth certain information at December 31, 2006 regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousand’s (000’s).


	Maturing		After one
	Within		but within		After
	one year		five years		five years		Total
Real estate loans	$	61,543	$	53,344	$	294,811	$	409,698
Consumer loans		664		2,282		74		3,020
Commercial business, other loans		35,634		15,730		7,634		58,998

Total loans receivable	$	97,841	$	71,356	$	302,519	$	471,716

The table below sets forth the dollar amount of all loans due after one year from December 31, 2006 which have predetermined interest rates or have floating or adjustable interest rates. The amounts are stated in thousands (000’s).


	Predetermined		Floating or
	rates		adjustable rates		Total
Real estate loans	$	156,697	$	192,032	$	348,729
Consumer loans		2,899		—		2,899
Commercial business, other loans		24,502		5,963		30,465

Total	$	184,098	$	197,995	$	382,093

Lending Area. 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, and to a lesser extent, LaPorte, Newton and Jasper counties in Indiana. The communities of Munster, Crown Point, Dyer, St. John, Merrillville, Schererville and Cedar Lake have experienced rapid growth and, therefore, have provided the greatest lending opportunities.

Loan Origination Fees. All loan origination and commitment fees, as well as incremental direct loan origination costs, are deferred and amortized into income as yield adjustments over the contractual lives of the related loans.

Loan Origination Procedure. The primary sources for loan originations are referrals from commercial customers, real estate brokers and builders, solicitations by the Bancorp’s lending and retail staff, and advertising of loan programs and rates. The Bancorp employs no staff appraisers. All appraisals are performed by fee appraisers that have been approved by the Board of Directors and who meet all federal guidelines and state licensing and certification requirements.

Designated officers have authorities, established by the Board of Directors, to approve loans. Loans from $600,000 to $2,000,000 are approved by the loan officers loan committee. Loans from $2,000,000 to $3,000,000 are approved by the senior officers loan committee. All loans in excess of $3,000,000, up to the legal lending limit of the Bank, must be approved by the Bank’s Board of Directors or its Executive Committee. (All members of the Bank’s Board of Directors and Executive Committee are also members of the Bancorp’s Board of Directors and Executive Committee, respectively.) Peoples Bank will not extend credit to any of its executive officers, directors, or principal shareholders or to any related interest of that person, except in compliance with the insider lending restrictions of Regulation O under the Federal Reserve Act and in an amount that, when aggregated with all other extensions of credit to that person, exceeds $500,000 unless: (1) the extension of credit has been approved in advance by a majority of the entire Board of Directors of the Bank, and (2) the interested party has abstained from participating directly or indirectly in the voting.

All loans secured by personal property must be covered by insurance in an amount sufficient to cover the full amount of the loan. All loans secured by real estate must be covered by insurance in an amount sufficient to cover the full amount of the loan or restore the property to its original state. First mortgage loans must be covered by a lenders title insurance policy in the amount of the loan.

The Current Lending Programs

Residential Mortgage Loans. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 100% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 100% of value. During 2006 over 90% of mortgage loans closed were conventional loans with borrowers having 20% or more equity in the property. This type of loan

does not require private mortgage insurance because of the borrower’s level of equity investment.

Fixed-rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one-to-four family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans with contractual maturities generally exceeding fifteen years may be sold and/or classified as held for sale to control exposure to interest rate risk.

The 15-year mortgage loan program has gained wide acceptance in the Bancorp’s primary market area. As a result of the shortened maturity of these loans, this product has been priced below the comparable 20 and 30 year loan offering. Mortgage applicants for 15 year loans tend to have a larger than normal down payment; this, coupled with the larger principal and interest payment amount, has caused the 15 year mortgage loan portfolio to consist, to a significant extent, of second time home buyers whose underwriting qualifications tend to be above average.

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini-Fixed” mortgage reprices annually after a three, five or seven year period. ARM originations totaled $23.3 million for 2006, $28.9 million for 2005, and $34.2 million for 2004. During 2006, ARMs represented 59% of total mortgage loan originations. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans, and terms offered by competitors.

Construction Loans. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers. These loans are personally guaranteed by the borrower. The maximum loan-to-value ratio is 80% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for periods of six months to one year.

Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the loans are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.

Commercial Real Estate Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable rate basis. These loans are typically made for terms of 15 to 20 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions so warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units, and other retail and commercial developments.

While commercial real estate lending is generally considered to involve a higher degree of risk than single-family residential lending due to the concentration of principal in a limited number of loans and the

effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways. In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.

Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp, or projects that are underwritten according to the Bank’s underwriting standards.

Consumer Loans. The Bancorp offers consumer loans to individuals for most personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products. The Bancorp purchases indirect dealer paper from various well-established businesses in its immediate banking area.

Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lenders title insurance policy. Loans are generally made up to a maximum of 80% of the appraised value of the property less any outstanding liens.

Home Improvement Loans and Equity Loans—Fixed Term. Home improvement and equity loans are made up to a maximum of 80% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 120 months. All home equity loans are made on a direct basis to borrowers.

Commercial Business Loans. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Conservative lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio: loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short-term working capital loans to established businesses; short-term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.

Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes and warrants within the local market area.

Non-Performing Assets, Asset Classification and Provision for Loan Losses

Loans are reviewed on a regular basis and are generally placed on a non-accrual status when, in the opinion of management, serious doubt exists as to the collectibility of a loan. Loans are generally placed on non-accrual status when either principal or interest is 90 days or more past due. Consumer non-residential loans are generally charged off when the loan becomes over 120 days delinquent. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance, tax and insurance reserve, or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan.

The Bancorp’s mortgage loan collection procedures provide that, when a mortgage loan is 15 days or more delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bancorp will recast the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his, her or its financial affairs. If the loan continues in a delinquent status for 60 days, the Bancorp will generally initiate foreclosure proceedings. Any property acquired as the result of foreclosure or by voluntary transfer of property made to avoid foreclosure is classified as foreclosed real estate until such time as it is sold or otherwise disposed of by the Bancorp. Foreclosed real estate is recorded at fair value at the date of foreclosure. At foreclosure, any write-down of the property is charged to the allowance for loan losses. Costs relating to improvement of property are capitalized, whereas holding costs are expensed. Valuations are periodically performed by management, and a valuation allowance is established by a charge to operations if the carrying value of a property exceeds its estimated fair value less selling costs. Subsequent gains or losses on disposition, including expenses incurred in connection with the disposition, are charged to operations. Collection procedures for consumer loans provide that when a consumer loan becomes ten days delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bancorp may grant a payment deferral. If a loan continues delinquent after 90 days and all collection efforts have been exhausted, the Bancorp will initiate legal proceedings. Collection procedures for commercial business loans provide that when a commercial loan becomes ten days delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower pursuant to the commercial loan collection policy. In certain instances, the Bancorp may grant a payment deferral or restructure the loan. Once it has been determined that collection efforts are unsuccessful, the Bancorp will initiate legal proceedings.

The table that follows sets forth information with respect to the Bancorp’s non-performing assets at December 31, for the periods indicated. During the periods shown, the Bancorp had no troubled debt restructurings, which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than market rates. The amounts are stated in thousands (000’s).


	2006			2005			2004			2003			2002
Loans accounted for on a non-accrual basis:
Real estate:
Residential	$	1,128		$	784		$	574		$	601		$	430
Commercial		1,467			62			136			137			1,197
Commercial business		301			266			266			611			363
Consumer		—			1			7			—			13

Total	$	2,896		$	1,113		$	983		$	1,349		$	2,003


Accruing loans which are contractually past due 90 days or more:
Real estate:
Residential	$	156		$	53		$	61		$	370		$	277
Commercial		—			815			5			—			105
Commercial business		—			130			—			—			—
Consumer		26			—			—			—			—

Total	$	182		$	998		$	66		$	370		$	382


Total of non-accrual and 90 days past due	$	3,078		$	2,111		$	1,049		$	1,719		$	2,385


Ratio of non-performing loans to total assets		0.50	%		0.34	%		0.19	%		0.34	%		0.49	%
Ratio of non-performing loans to total loans		0.65	%		0.45	%		0.24	%		0.42	%		0.63	%

Foreclosed real estate	$	323		$	260		$	280		$	—		$	127

Ratio of foreclosed real estate to total assets		0.05	%		0.04	%		0.05	%		0.00	%		0.03	%

During 2006, gross interest income of $228,000 would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period. Interest on such loans included in income during the period amounted to $100,000.

Federal regulations require savings banks to classify their own loans and to establish appropriate general and specific allowances, subject to regulatory review. These regulations are designed to encourage management to evaluate loans on a case-by-case basis and to discourage automatic classifications. Loans classified as substandard or doubtful must be evaluated by management to determine loan loss reserves. Loans classified as loss must either be written off or reserved for by a specific allowance. Amounts reported in the general loan loss reserve are included in the calculation of the Bancorp’s total risk-based capital requirement (to the extent that the amount does not exceed 1.25% of total risk-based assets), but are not included in Tier 1 leverage ratio calculations and Tier 1 risk-based capital requirements. Amounts reserved for by a specific allowance are not counted toward capital for purposes of any of the regulatory capital requirements. Loans, internally classified as substandard totaled $6.9 million at December 31, 2006, compared to $3.2 million at December 31, 2005. The increase in substandard loans is primarily related to an increase in loans secured by residential and commercial real estate loans. No loans were classified as doubtful or loss. 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 more closely monitoring due to one or more factors that may cause the loan to become classified. Watch loans totaled $7.6 million at December 31, 2006, compared to $8.9 million at December 31, 2005.

At December 31, 2006, impaired loans totaled $1.9 million, compared to $1.7 million at December 31, 2005. The impaired loan balances were also classified as non-performing loans at the end of both periods. The December 31, 2006 impaired loan balances consist of five impaired loans to two commercial borrowers that are secured by business assets and real estate, and are personally guaranteed by the owner of the business. Impaired loans are loans where full payment under the loan terms is not expected. There were no other loans considered to be impaired loans as of, or for the year ended, December 31, 2006.

At December 31, 2006, management is of the opinion that there are no loans, except those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as non-accrual, past due or restructured loans. Also, at December 31, 2006, there were no other interest bearing assets that would be required to be disclosed as non-accrual, past due, restructured or potential problems if such assets were loans. Management does not presently anticipate that any of the non-performing loans or classified loans would materially impact future operations, liquidity or capital resources.

Notwithstanding, the above, the Bancorp has a $1.1 million participation in a $6.4 million letter of credit, which acts as payment support to bondholders. While the Bancorp’s management currently believes that the principal of the borrower has the financial capacity to meet future bond repayment obligations. Cash flows from the security collateralizing the letter of credit have been negatively impacted due to the closing of a major tenant. Management will continue to monitor the letter of credit and bond repayments.

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 probable incurred losses that arise from the loan portfolio and is not segregated for, or allocated to, any particular loan or group of loans. For the twelve months ended December 31, 2006, $15 thousand in additions to the ALL account were required, compared to $245 thousand for the twelve months ended December 31, 2005. The December 31, 2006 ALL contained a specific allowance for the collateral deficiency associated with three loans totaling $1.4 million, which had been classified as impaired at December 31, 2006 and December 31, 2005, and placed in non-accrual status during the first quarter of 2006. Recoveries, net of charge-offs, totaled $71 thousand for the current twelve months, compared to recoveries, net of charge-offs of $44 thousand for the twelve months ended December 31, 2005. Changes in the provision take into consideration management’s current

judgments about the credit quality of the loan portfolio, loan portfolio growth, changes in the portfolio mix and local economic conditions. In determining the provision for loan loss for the current period, management has given consideration to increased risks associated within the local economy, changes in loan mix and asset quality.

The ALL to total loans was 0.90% at December 31, 2006, compared to 0.89% at December 31, 2005, while the ALL to non-performing loans (coverage ratio) was 138.6% at December 31, 2006, compared to 198.1% at December 31, 2005. A consistently strong coverage ratio is an indicator that sufficient provisions for loan losses have been established. The December 31, 2006 balance in the ALL account of $4.3 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 general reserves to both performing and non-performing loans based on current information available.

The table that follows sets forth the allowance for loan losses and related ratios for the periods indicated. There were no charge-offs or recoveries of real estate construction loans during the periods presented. The amounts are stated in thousands (000’s).


	2006			2005			2004			2003			2002
Balance at beginning of period	$	4,181		$	3,892		$	3,787		$	3,635		$	3,156
Loans charged-off:
Real estate — residential		—			(37	)		(14	)		—			—
Commercial real estate		—			—			—			(136	)		—
Commercial business		—			—			(297	)		(120	)		(300	)
Consumer		(7	)		—			(30	)		(21	)		(36	)

Total charge-offs		(7	)		(37	)		(341	)		(277	)		(336	)
Recoveries:
Residential real estate		20			18			41			—			—
Commercial real estate		33			—			—			3			—
Commercial business		21			60			14			—			91
Consumer		4			3			6			6			4

Total recoveries		78			81			61			9			95
Net (charge-offs) / recoveries		71			44			(280	)		(268	)		(241	)

Provision for loan losses		15			245			385			420			720

Balance at end of period	$	4,267		$	4,181		$	3,892		$	3,787		$	3,635


ALL to loans outstanding		0.90	%		0.89	%		0.90	%		0.92	%		0.96	%
ALL to nonperforming loans		138.60	%		198.10	%		371.00	%		220.30	%		152.40	%
Net charge-offs / recoveries to average loans out - standing during the period		0.02	%		0.01	%		0.07	%		0.07	%		0.07	%

The following table shows the allocation of the allowance for loan losses at December 31, for the dates indicated. The dollar amounts are stated in thousands (000’s). The percent columns represent the percentage of loans in each category to total loans.


	2006				2005				2004				2003				2002
	$		%		$		%		$		%		$		%		$		%
Real estate loans:
Residential		761		60.0		644		55.1		550		57.2		500		58.9		450		58.0
Commercial and other dwelling		1,472		26.9		1,089		24.0		950		24.0		637		26.1		1,750		25.8
Consumer loans		87		0.6		99		6.1		150		5.2		150		4.8		120		5.6
Commercial business and other		1,947		12.5		2,349		14.8		2,242		13.6		2,500		10.2		1,315		10.6

Total		4,267		100.0		4,181		100.0		3,892		100.0		3,787		100.0		3,635		100.0

Investment Activities

The primary objective of the 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. Securities are classified as either held-to-maturity (HTM) or available-for-sale (AFS) at the time of purchase. No securities are classified as trading. At December 31, 2006, AFS securities totaled $83.8 million or 84.6% of total securities. AFS securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. During 2006, the Bancorp did not have derivative instruments and was not involved in hedging activities as defined by SFAS No. 133. It has been the policy of the Bancorp to invest its excess cash in U.S. government agency securities, mortgage-backed securities, collateralized mortgage obligations and municipal securities. In addition, short-term funds are generally invested as interest-bearing balances in financial institutions and federal funds. At December 31, 2006, the Bancorp’s investment portfolio totaled $99.0 million. In addition, the Bancorp had $0 in federal funds sold, and $3.5 million in FHLB stock.

The table below shows the carrying values of the components of the investment securities portfolio at December 31, on the dates indicated. The amounts are stated in thousands (000’s).


	2006		2005		2004
U.S. government agencies:
Available-for-sale		40,504		45,843		42,947
Mortgage-backed securities (1):
Available-for-sale		15,955		14,702		13,045
Held-to-maturity		538		550		564
Collateralized Mortgage Obligations(1):
Available-for-sale		22,347		12,957		12,324
Municipal Securities:
Available-for-sale		4,959		2,880		845
Held-to-maturity		14,709		13,161		10,254

Totals	$	99,012	$	90,093	$	79,979


(1)		Mortgage-backed securities and Collateralized Mortgage Obligations are U.S. government agency and sponsored securities.

The contractual maturities and weighted average yields for the U.S. government securities, agency securities, municipal securities, mortgage-backed securities and collateralized mortgage obligations at December 31, 2006, are summarized as follows. The carrying values are stated in thousands (000’s).


	Within 1 Year					1 - 5 Years					5 - 10 Years					After 10 Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. government Securities:
AFS		—		0	%		—		0	%		—		0	%		—		0	%
U.S. government Agencies:
AFS		18,329		2.92	%		18,682		4.00	%		3,493		5.60	%		—		0	%
HTM		—		0	%		—		0	%		—		0	%		—		0	%
Municipal Securities:
AFS		—		0	%		310		3.17	%		1,514		5.64	%		3,135		5.95	%
HTM		—		0	%		—		0	%		3,374		5.97	%		11,335		6.10	%
Mortgage-backed Securities:
AFS		—		0	%		2,150		3.99	%		6,180		4.25	%		7,625		5.37	%
HTM		—		0	%		—		0	%		—		0	%		538		5.53	%
Collateralized Mortgage Obligations:
AFS		—		0	%		—		0	%		—		0	%		22,347		5.02	%

Totals	$	18,329		2.85	%	$	21,142		3.53	%	$	14,561		4.39	%	$	44,980		2.85	%

Sources of Funds

General. Deposits are the major source of the Bancorp’s funds for lending and other investment purposes. In addition to deposits, the Bancorp derives funds from maturing investment securities and certificates of deposit, dividend receipts from the investment portfolio, loan principal repayments, repurchase agreements, advances from the Federal Home Loan Bank of Indianapolis (FHLB) and other borrowings. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of other sources of funds. They may also be used on a longer-term basis for general business purposes. The Bancorp uses repurchase agreements, as well as, a line-of-credit and advances from the FHLB for borrowings. At December 31, 2006, the Bancorp had $14.7 million in repurchase agreements. Other borrowings totaled $36.8 million, of which $32.0 million represents FHLB advances.

Deposits. Retail and commercial deposits are attracted principally from within the Bancorp’s primary market area. The Bancorp offers a broad selection of deposit instruments including checking accounts, NOW accounts, savings accounts, money market deposit accounts, certificate accounts and retirement savings plans. Deposit accounts vary as to terms, with the principal differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. Certificate accounts currently range in maturity from ten days to 42 months. The deregulation of federal controls on insured deposits has allowed the Bancorp to be more competitive in obtaining funds and to be flexible in meeting the threat of net deposit outflows. The Bancorp does not obtain funds through brokers.

The following table presents the average daily amount of deposits bearing interest and average rates paid on such deposits for the years indicated. The amounts are stated in thousands (000’s).


	2006				2005				2004
	Amount		Rate %		Amount		Rate %		Amount		Rate %
Demand deposits	$	45,862		—	$	49,506		—	$	47,288		—
NOW accounts		56,412		1.06		56,119		0.79		52,857		0.78
MMDA accounts		133,558		3.06		105,130		1.63		78,326		1.07
Savings accounts		58,586		0.43		68,403		0.49		71,354		0.51
Certificates of deposit		213,419		3.99		203,723		2.68		191,004		1.95

Total deposits	$	507,837		2.65	$	482,881		1.65	$	440,829		1.21

Maturities of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2006 are summarized as follows. The amounts are stated in thousands (000’s).


3 months or less	$	35,148
Over 3 months through 6 months		25,723
Over 6 months through 12 months		17,839
Over 12 months		2,677

Total	$	81,387

Borrowings. Borrowed money is used on a short-term basis 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. Repurchase agreements generally mature within one year and are generally secured by U.S. government securities or U.S. agency securities, under the Bancorp’s control. FHLB advances with maturities ranging from one year to eight 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. Fixed rate advances are payable at maturity, with a prepayment penalty. Putable advances are fixed for a period of one to three years and then may adjust annually to the three-month London Interbank Offered Rate (LIBOR) until maturity. Once the putable advance interest rate adjusts, the Bancorp has the option to prepay the advance on specified annual interest rate reset dates without prepayment penalty.

The following table sets forth certain information regarding repurchase agreements by the Bancorp at the end of and during the periods indicated. The amounts are stated in thousands (000’s).


	2006		2005		2004
Repurchase agreements	$	14,717	$	12,075	$	11,458
Fixed rate advances from the FHLB		30,000		33,000		29,000
Putable advances from the FHLB		2,000		4,500		7,500
Variable advances from the FHLB		—		—		3,000
FHLB line-of-credit		3,089		—		5,242
Limited partnership obligation		60		124		186
Overdrawn due from & Treasury Tax & Loan		1,635		1,454		815

Total borrowings	$	51,501	$	51,153	$	57,201


	At December 31,
	2006			2005			2004
Balance	$	14,717		$	12,075		$	11,458
Securities underlying the agreements:
Ending carrying amount		20,329			21,122			20,108
Ending fair value		20,329			21,122			20,108
Weighted average rate paid (1)		4.20	%		3.40	%		2.13	%


	For year ended December 31,
	2006			2005			2004
Highest month-end balance	$	21,715		$	14,490		$	15,233
Approximate average outstanding balance		14,186			13,938			13,439
Approximate weighted average rate paid on securities sold under agreements to repurchase (2)		3.42	%		2.54	%		1.80	%


(1)		The weighted average rate for each period is calculated by weighting the principal balances outstanding for the various interest rates.

(2)		The weighted average rate is calculated by dividing the interest expense for the period by the average daily balances of securities sold under agreements to repurchase for the period.

The limited partnership obligation represents an investment interest in a partnership formed for the construction, ownership and management of affordable housing projects. The original amount of the note was $500,000. Funding began during 2000 and will continue over a nine-year period. Payments are required within ten days of written demand. The obligation to make payment is absolute and unconditional. The note requires no payment of interest.

Trust Powers

The activities of the Bancorp’s Wealth Management Group provides estate and retirement planning, guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts, investment agency accounts, and serves as personal representative of estates and acts as trustee for revocable and irrevocable trusts. At December 31, 2006, the market value of the Wealth Management Group’s assets totaled $142.0 million.

Analysis of Profitability and Key Operating Ratios

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential.

The net earnings of the Bancorp depend primarily upon the “spread” (difference) between (a) the income it receives from its loan portfolio and other investments, and (b) its cost of money, consisting principally of the interest paid on savings accounts and on other borrowings.

The following table presents the weighted average yields on loans and investment securities, the weighted average cost of interest-bearing deposits and other borrowings, and the interest rate spread at December 31, 2006.


Weighted average yield:
Securities	4.26	%
Loans receivable	6.20
Federal Home Loan Bank stock	4.75
Total interest-earning assets	6.10

Weighted average cost:
Deposit accounts	3.06
Borrowed funds	3.76
Total interest-bearing liabilities	3.12

Interest rate spread:
Weighted average yield on interest-earning assets minus the weighted average cost of interest-bearing funds	2.98

The average balance sheet amounts, the related interest income or expense, and average rates earned or paid are presented in the following table. The amounts are stated in thousands (000’s)


	Year ended December 31, 2006								Year ended December 31, 2005								Year ended December 31, 2004
				Interest								Interest								Interest
	Average			Income/		Average			Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Rate			Balance			Expense		Rate			Balance			Expense		Rate

Assets:

Interest bearing balances in financial institutions	$	8,080		$	401		4.97	%	$	13,096		$	418		3.19	%	$	5,571		$	74		1.33	%
Federal funds sold		1,965			95		4.85			718			53		7.38			597			13		2.17
Securities		98,759			4,057		4.11			88,634			3,289		3.71			79,965			2,818		3.52

Total investments		108,804			4,553		4.19			102,448			3,760		3.67			86,133			2,905		3.37

Loans*
Real estate mortgage loans		405,062			25,819		6.37			376,290			22,363		5.94			362,200			21,007		5.80
Commercial business loans		63,457			4,356		6.86			63,047			3,633		5.76			47,551			2,371		4.99
Consumer loans		3,692			250		6.78			4,186			267		6.38			5,347			331		6.19

Total loans		472,211			30,425		6.44			443,523			26,264		5.92			415,098			23,709		5.71

Total interest-earning assets		581,015			34,978		6.02			545,971			30,024		5.50			501,232			26,614		5.31

Allowance for loan losses		(4,227	)							(4,013	)							(3,813	)
Cash and due from banks		13,491								16,027								15,963
Premises and equipment		14,490								14,424								14,211
Other assets		16,927								14,436								8,894

Total assets	$	621,696							$	586,844							$	536,486


Liabilities:

Demand deposit	$	45,862			—		0.00	%	$	49,506			—		0.00	%	$	47,288			—		0.00	%
NOW accounts		56,412			599		1.06			56,119			443		0.79			52,857			410		0.78
Money market demand accounts		133,558			4,091		3.06			105,130			1,710		1.63			78,326			837		1.07
Savings accounts		58,586			249		0.43			68,403			335		0.49			71,354			365		0.51
Certificates of deposit		213,419			8,520		3.99			203,723			5,458		2.68			191,005			3,727		1.95

Total interest-bearing deposits		507,837			13,459		2.65			482,880			7,946		1.65			440,830			5,339		1.21
Borrowed funds		60,224			2,278		3.78			54,260			1,812		3.34			48,975			1,519		3.10

Total interest-bearing liabilities		568,061			15,737		2.77			537,140			9,758		1.82			489,805			6,858		1.40

Other liabilities		5,381								4,212								3,723

Total liabilities		573,442								541,352								493,528


Stockholders’ equity		48,254								45,492								42,958

Total liabilities and stockholders’ equity	$	621,696							$	586,844							$	536,486

Net interest income				$	19,241							$	20,266							$	19,756

Net interest spread							3.25	%							3.68	%							3.91	%
Net interest margin**							3.31	%							3.71	%							3.94	%

* Non-accruing loans have been included in the average balances.

** Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense of the Bancorp for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (change in volume multiplied by old rate) and (2) changes in rate (change in rate multiplied by old volume). Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. The amounts are stated in thousands (000’s).


	Year ended December 31,									Year ended December 31,							Year ended December 31,
	2006			vs.			2005			2005		vs.			2004		2004			vs.			2003
	Increase / (Decrease)									Increase / (Decrease)							Increase / (Decrease)
	Due To									Due To							Due To
	Volume			Rate			Total			Volume		Rate			Total		Volume			Rate			Total
Interest income:
Loans receivable	$	1,762		$	2,399		$	4,161		$	1,662	$	893		$	2,555	$	1,196		$	(1,620	)	$	(424	)
Securities		396			372			768			316		155			471		701			8			709
Other interest-earning assets		(150	)		175			25			179		205			384		(61	)		31			(30	)

Total interest-earning assets		2,008			2,946			4,954			2,157		1,253			3,410		1,836			(1,581	)		255


Interest Expense:
Deposits		430			5,083			5,513			548		2,059			2,607		409			(1,280	)		(871	)

Borrowed Funds		211			255			466			171		122			293		359			(151	)		208

Total interest-bearing liabilities		641			5,338			5,979			719		2,181			2,900		768			(1,431	)		(663	)


Net change in net interest income/(expense)	$	1,367		$	(2,392	)	$	(1,025	)	$	1,438	$	(928	)	$	510	$	1,068		$	(150	)	$	918

Bank Subsidiary Activities

Peoples Service Corporation, a wholly owned subsidiary of the Bank was incorporated under the laws of the State of Indiana. The subsidiary currently provides insurance and annuity investments to the Bank’s wealth management customers. At December 31, 2006, the Bank had an investment balance of $78 thousand in Peoples Service Corporation.

NWIN, LLC is a wholly owned subsidiary of the Bank. NWIN, LLC was incorporated under the laws of the State of Nevada as an investment subsidiary. The investment subsidiary currently holds Bank security investments, which are managed by a professional portfolio manager. In addition, the investment subsidiary is the parent of a real estate investment trust, NWIN Funding, Inc., that invests in real estate loans originated by the Bank. At December 31, 2006, the Bank had an investment balance of $209.1 million in NWIN, LLC.

NWIN Funding, Inc., was formed on September 1, 2006, as an Indiana Real Estate Investment Trust. The formation of NWIN Funding, Inc. provides the Bancorp with a vehicle that may be used to raise capital utilizing portfolio mortgages as collateral, without diluting stock ownership. In addition, NWIN Funding, Inc. will receive favorable state tax treatment for income generated by its operations. As a result, $127.4 million in real estate loans were paid as a dividend for an initial capital contribution from the Bank to NWIN Funding, Inc. on September 1, 2006.

The Consolidated Financial Statements of the Bancorp include the assets, liabilities, net worth and results of operations of the Bank and its subsidiaries. Significant inter-company transactions have been eliminated in the consolidation.

Competition

The Bancorp’s primary market area for deposits, loans and financial services encompasses Lake County, in northwest Indiana, where all of its offices are located. Ninety-five percent of the Bancorp’s business activities are within this area.

The Bancorp faces strong competition in its primary market area for the attraction and retention of deposits and in the origination of loans. The Bancorp’s most direct competition for deposits has historically come from commercial banks, savings associations and credit unions located in its primary market area. Particularly in times of high interest rates, the Bancorp has had significant competition from mutual funds and other firms offering financial services. The Bancorp’s competition for loans comes principally from savings associations, commercial banks, mortgage banking companies, credit unions, insurance companies and other institutional lenders.

The Bancorp competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of the services it provides borrowers, real estate brokers and homebuilders and land developers. It competes for deposits by offering depositors a wide variety of savings accounts, checking accounts, competitive interest rates, convenient banking center locations, drive-up facilities, automatic teller machines, tax-deferred retirement programs, electronic banking and other miscellaneous services.

The activities of the Bancorp and the Bank in the geographic market served involve competition with other banks as well as with other financial institutions and enterprises, many of which have substantially greater resources than those available to the Bancorp. In addition, non-bank competitors are generally not subject to the extensive regulation applicable to the Bancorp and the Bank.

Personnel

As of December 31, 2006, the Bank had 135 full-time and 26 part-time employees. The employees are not represented by a collective bargaining agreement. Management believes its employee relations are good. The Bancorp has four officers (listed below under Item 4.5 “Executive Officers of the Bancorp”), but has no other employees. The Bancorp’s officers also are full-time employees of the Bank, and are compensated by the Bank.

Regulation and Supervision

Bank Holding Company Regulation. As a registered bank holding company for the Bank, the Bancorp is subject to the regulation and supervision of the FRB under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bank holding companies are required to file periodic reports with and are subject to periodic examination by the FRB.

Under the BHCA, without the prior approval of the FRB, the Bancorp may not acquire direct or indirect control of more than 5% of the voting stock or substantially all of the assets of any company, including a bank, and may not merge or consolidate with another bank holding company. In addition, the Bancorp is generally prohibited by the BHCA from engaging in any nonbanking business unless such business is determined by the FRB to be so closely related to banking as to be a proper incident thereto. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Under FRB policy, a bank holding company is expected to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the FRB that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. This support may be required by the FRB at times when the Bancorp may not have the resources to provide it or, for other reasons, would not be inclined to provide it. Additionally, under the Federal Deposit Insurance Corporation Improvements Act of 1991 (“FDICIA”), a bank holding company is required to provide limited guarantee of the compliance by any insured depository institution subsidiary that may become “undercapitalized” (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency.

Savings Bank Regulation. As an Indiana stock savings bank, the Bank is subject to federal regulation and supervision by the FDIC and to state regulation and supervision by the DFI. The Bank’s deposit accounts are insured by DIF, which is administered by the FDIC. The Bank is not a member of the Federal Reserve System.

Both federal and Indiana law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires savings banks, among other things, to make deposited funds available within specified time periods.

Under FDICIA, insured state chartered banks are prohibited from engaging as principal in activities that are not permitted for national banks, unless: (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund, and (ii) the bank is, and continues to be, in compliance with all applicable capital standards.

Branches and Affiliates. The establishment of branches by the Bancorp is subject to approval of the DFI and FDIC and geographic limits established by state laws. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) facilitates the interstate expansion and consolidation of banking organizations by permitting, among other things,(i) bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home state regardless of whether such acquisitions are authorized under the law of the host state, (ii) the interstate merger of banks, subject to the right of individual states to “opt out” of this authority, and (iii) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state.

Transactions with Affiliates. Under Indiana law, the Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies, such as the Bancorp. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank’s extension of credit to an affiliate.

Capital Requirements. The FRB and the FDIC have issued substantially similar risk-based and leverage capital guidelines that are applicable to the Bancorp and the Bank. These guidelines require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total required capital must be “Tier 1 capital,” consisting principally of common stockholders’ equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder (“Tier 2 capital”) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the allowance for loan losses.

In addition to the risk-based capital guidelines, the Bancorp and the Bank are subject to a Tier 1 (leverage) capital ratio which requires a minimum level of Tier 1 capital to adjusted average assets of 3% in the case of financial institutions that have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other institutions are expected to maintain a ratio of at least 1% to 2% above the stated minimum.

FDICIA requires, among other things, federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. The FDIC has adopted regulations to implement the prompt corrective action provisions of FDICIA, which, among other things, define the relevant capital measures for five capital categories. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure.

The following table shows that, at December 31, 2006, the Bancorp’s capital exceeded all regulatory capital requirements. At December 31, 2006, the Bancorp’s and the Bank’s regulatory capital ratios were substantially the same. At December 31, 2006, the Bancorp and the Bank were categorized as well capitalized. The dollar amounts are stated in millions.


						Required for					To be well
	Actual					adequate capital					capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk weighted assets	$	54,665		12.0	%	$	36.4		8.0	%	$	45.5		10.0	%
Tier 1 capital to risk weighted assets	$	50,398		11.1	%	$	18.2		4.0	%	$	27.3		6.0	%
Tier 1 capital to adjusted average assets	$	50,398		8.0	%	$	19.0		3.0	%	$	31.7		5.0	%

Banking regulators may change these requirements from time to time, depending on the economic outlook generally and the outlook for the banking industry. The Bancorp is unable to predict whether and when higher capital requirements would be imposed and, if so, to what levels and on what schedule.

Dividend Limitations. The Bancorp is a legal entity separate and distinct from the Bank. The primary source of the Bancorp’s cash flow, including cash flow to pay dividends on the Bancorp’s Common Stock, is the payment of dividends to the Bancorp by the Bank. Under Indiana law, the Bank may pay dividends of so much of 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 DFI for the payment of a dividend if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income” means net income as calculated for call report purposes, less all dividends declared for the applicable period. Also, the FDIC has the authority to prohibit the Bank from paying dividends if, in its opinion, 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 that may be declared by the Bank in 2007, without prior regulatory approval, approximates $4,907,000 plus current 2007 net profits. In addition, under FRB supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the

organization’s capital needs, assets, quality, and overall financial condition.

Federal Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings associations and safeguards the safety and soundness of the banking and savings industries. The FDIC administers the DIF, which generally insures commercial bank, savings association and state savings bank deposits. The DIF was created as a result of the merger of the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) as of March 31, 2006, pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Bank is a member of the DIF and its deposit accounts are insured by the FDIC up to prescribed limits. See “Recent Legislative Developments.”

The FDIC is authorized to establish annual deposit insurance assessment rates for members of the DIF, and to increase assessment rates if it determines such increases are appropriate to maintain the reserves of the insurance fund. In addition, the FDIC is authorized to levy emergency special assessments on DIF members. Pursuant to the final regulations adopted under the Reform Act on November 2, 2006, the FDIC’s deposit insurance premiums are now assessed through a new risk-based system under which all insured depository institutions are placed into one of four categories and assessed insurance premiums based upon their level of capital and risk profile. See “Recent Legislative Developments.” The Bank paid deposit insurance assessments of $0 during the year ended December 31, 2006. Future increase in deposit insurance premiums or changes in risk classification would increase the Bank’s deposit related costs.

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to recapitalize the predecessor to the SAIF. The assessment rate for 2006 was approximately 0.012% of insured deposits. These assessments will continue until the Financing Corporation bonds mature in 2017.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Indianapolis, which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of trustees of the Federal Home Loan Bank. As a member, the Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Indianapolis in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of our outstanding advance from the Federal Home Loan Bank. At December 31, 2006, the Bank was in compliance with this requirement.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA

requires the FDIC in connection with its examination of the Bank, to assess its record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by the Bank. For example, the regulations specify that a bank’s CRA performance will be considered in its expansion (e.g., branching) proposals and may be the basis for approving, denying or conditioning the approval of an application. As of the date of its most recent regulatory examination, the Bank was rated “satisfactory” with respect to its CRA compliance.

Gramm-Leach-Bliley Act. Under the Gramm-Leach-Bliley Act (“Gramm-Leach”), bank holding companies are permitted to offer their customers virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. In order to engage in these new financial activities, a bank holding company must qualify and register with the FRB as a “financial holding company” by demonstrating that each of its bank subsidiaries is well capitalized, well managed, and has at least a satisfactory rating under the CRA. The Bancorp has no current intention to elect to become a financial holding company under Gramm-Leach.

Gramm-Leach established a system of functional regulation, under which the federal banking agencies regulate the banking activities of financial holding companies, the U.S. Securities and Exchange Commission regulates their securities activities and state insurance regulators regulate their insurance activities.

Under Gramm-Leach, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of Gramm-Leach affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.

The Bancorp does not disclose any nonpublic information about any current or former customers to anyone except as permitted by law and subject to contractual confidentially provisions which restrict the release and use of such information.

Recent Legislative Developments. The USA PATRIOT Act of 2001 (the “PATRIOT Act”) is intended to strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety of fronts. The PATRIOT Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes. In addition, financial institutions are required under this statute to adopt reasonable procedures to verify the identity of any person seeking to open an account and maintain records to verify such person’s identity. Many of the provisions in the PATRIOT Act were to have expired December 31, 2005, but the U.S. Congress authorized renewals that extended the provisions until March 10, 2006. In early March 2006, the U.S. Congress approved the USA PATRIOT Improvement and Reauthorization Act of 2005 (the “Reauthorization Act”) and the USA PATRIOT Act Additional Reauthorizing Amendments Act of 2006 (the “PATRIOT Act Amendments”), and they were signed into law by President Bush on March 9, 2006. The Reauthorization Act makes permanent all but two of the provisions that had

been set to expire and provides that the remaining two provisions, which relate to surveillance and the production of business records under the Foreign Intelligence Surveillance Act, will expire in four years. The PATRIOT Act Amendments include provisions allowing recipients of certain subpoenas to obtain judicial review of nondisclosure orders and clarifying the use of certain subpoenas to obtain information from libraries. The Company does not anticipate that these requirements will materially affect its operations.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reportings. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws.

The Securities and Exchange Commission has adopted final rules implementing Section 404 of the Sarbanes-Oxley Act. In each Form 10-K it files, beginning with its 10-K for the fiscal year ended December 31, 2007, the Bancorp will be required to include a report of management on the Bancorp’s internal control over financial reporting. The internal control report must include a statement of management’s responsibility for establishing and maintaining adequate control over financial reporting of the Bancorp, identify the framework used by management to evaluate the effectiveness of the Bancorp’s internal control over financial reporting and provide management’s assessment of the effectiveness of the Bancorp’s internal control over financial reporting. In addition, beginning with the Bancorp’s 10-K for the fiscal year ended December 31, 2008, the internal control report must state that the Bancorp’s independent accounting firm has issued an attestation report on management’s assessment of the Bancorp’s internal control over financial reporting. The Bancorp anticipates that significant efforts will be required to comply with Section 404 in 2007 and in future years. In addition, the Securities and Exchange Commission in 2006 adopted significant changes to its proxy statement disclosure rules relating to executive compensation. Among other things, several tables, more detailed narrative disclosures and a new compensation discussion and analysis section are required in proxy statements. These changes have required and will require a significant commitment of managerial resources and will result in increased costs to the Bancorp, which would adversely affect results of operations, or cause fluctuations in results of operations, in the future.

On February 8, 2006, President Bush signed into law the Federal Deposit Insurance Reform Act of 2005. This statute reforms the deposit insurance system by:

	•		merging the Bank Insurance Fund and the Savings Association Insurance Fund into a new Deposit Insurance Fund no later than July 1, 2006 (the merger of the BIF and SAIF into DIF became effective as of March 31, 2006);

	•		keeping the insurance coverage limit for individual accounts and municipal accounts at $100,000 but providing an inflation

			adjustment process which permits an adjustment effective January 1, 2011 and every five years thereafter based on the Personal Consumption Expenditures Index (with 2005 as the base year of comparison), unless the FDIC concludes such adjustment would be inappropriate for reasons relating to risks to the DIF;

	•		increasing insurance coverage limits for retirement accounts to $250,000, subject to the same inflation adjustment process described above;

	•		prohibiting undercapitalized members from accepting employee benefit plan deposits;

	•		providing for the payment of credits based on a member’s share of the assessment base as of December 31, 1996 and equal to an aggregate of $4.7 billion for all members, which credits can offset FDIC assessments subject to certain limits;

	•		providing for the declaration of dividends to members (based on a member’s share of the assessment base on December 31, 1996, and premiums paid after that date) equal to 50% of the amount in the DIF in excess of a reserve ratio of 1.35% and 100% of such amount in excess of a reserve ratio of 1.50%, subject to the FDIC’s right to suspend or limit dividends based on risks to the DIF; and

	•		eliminating the mandatory assessment (up to 23 basis points) if the DIF falls below 1.25% of insured deposits and retaining assessments based on risk, needs of the DIF, and the effect on the members’ capital and earnings. The FDIC is authorized to set a reserve ratio of between 1.15% and 1.5% and will have five years to restore the DIF if the ratio falls below 1.15%. On November 2, 2006, the FDIC adopted final regulations that set the designated reserve ratio for the DIF at 1.25% beginning January 1, 2007.

Insured depository institutions that were in existence on December 31, 1996, and paid assessments prior to that date (or their successors) are entitled to a one-time credit against future assessments based on their past contributions to the BIF or SAIF. In 2006, the Bank received a one-time credit of $357 thousand against future assessments.

Also on November 2, 2006, the FDIC adopted final regulations that establish a new risk-based premium system. Under the new system, the FDIC will evaluate each institution’s risk based on three primary sources of information: supervisory ratings for all insured institutions, financial ratios for most institutions and long-term debt issuer ratings for large institutions that have such ratings. An institution’s assessments will be based on the insured institution’s ranking in one of four risk categories. Effective January 1, 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2 are grouped in Risk Category I and will be assessed for deposit insurance at an annual rate of between five and seven cents for every $100 of domestic deposits. Institutions in Risk Categories II, III and IV will be assessed at annual rates of 10, 28 and 43 cents, respectively. An increase in assessments could have a material adverse affect on the Bancorp’s earnings.

Various other legislation, including proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies, is from time to time introduced. This legislation may change banking statutes and the operating environment of the Bancorp and the Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks,

savings associations, credit unions and other financial institutions. The Bancorp cannot accurately predict whether any of this potential legislation will ultimately be enacted, and, if enacted, the ultimate effect that it, or implementing regulations, would have upon the financial condition or results of operations of the Bancorp or the Bank.

Federal Taxation

Historically, savings institutions, such as the Bank, had been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, In August, 1996, legislation was enacted that repealed the reserve method of accounting for federal income tax purposes. As a result, the Bank must recapture that portion of the reserve that exceeds the amount that could have been taken under the experience method for post-1987 tax years. The recapture occurred over a six-year period, the commencement of which began with the Bank’s taxable year ending December 31, 1998, since the Bank met certain residential lending requirements. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i)the Bank no longer qualifies as a bank under the Code, or (ii) excess dividends or distributions are paid out by the Bank.

Depending on the composition of its items of income and expense, a savings bank may be subject to the alternative minimum tax. A savings bank must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income (“AMTI”), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years.

For federal income tax purposes, the Bank reports its income and expenses on the accrual method of accounting. The Bancorp and the Bank file a consolidated federal income tax return for each fiscal year ending December 31. The federal income tax returns filed by the Bank have not been subject to an IRS examination in the last five years.

State Taxation

The Bank is subject to Indiana’s Financial Institutions Tax (“FIT”), which is imposed at a flat rate of 8.5% on “adjusted gross income.” “Adjusted gross income,” for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes.

During 2006, the Bank’s state income tax returns were subject to an examination by the Indiana Department of Revenue. No improper tax positions were identified during the examination. In the last five years, the Bank’s state income returns have not been subject to any other examination by a taxing authority.

Accounting for Income Taxes

At December 31, 2006, the Bancorp’s consolidated total deferred tax assets were $2.7 million and the consolidated total deferred tax liabilities were $1.2 million, resulting in a consolidated net deferred tax asset of $1.5 million. Management believes it is probable that the benefit of the deferred tax asset will be realized after considering the historical and anticipated future levels of pretax earnings.

Item 1A. Risk Factors

In analyzing whether to make or continue an investment in the Bancorp, investors should consider, among other factors, the following:

Federal and State Government Regulations. The banking industry is heavily regulated. As discussed above, the Bank and Bancorp are subject to regulation and supervision by the DFI, FDIC, FRB, and SEC (Securities and Exchange Commission). These regulations are intended to protect depositors, not shareholders. The burden imposed by federal and state regulations put banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies and leasing companies. In particular, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are changes in the discount rate charged on bank borrowings and changes in the reserve requirements for bank deposits. It is not possible to predict what changes, if any, will be made to the monetary policies of the Federal Reserve Board or to existing federal and state legislation or the effect that such changes may have on the future business and earning prospects of the Bancorp.

Legislation. Because of concerns relating to the competitiveness and the safety and soundness of the industry, Congress continues to consider a number of wide-ranging proposals for altering the structure, regulation, and competitive relationships of the nation’s financial institutions. Among such bills are proposals to combine banks and thrifts under a unified charter and to combine regulatory agencies. Management cannot predict whether or in what form any of these proposals will be adopted or the extent to which the business of the Bancorp or the Bank may be affected thereby.

Credit Risk. One of the greatest risks facing lenders is credit risk, the risk of losing principal and interest due to a borrower’s failure to perform according to the terms of a loan agreement. While management attempts to provide an allowance for loan losses at a level adequate to cover probable incurred losses based on loan portfolio growth, past loss experience, general economic conditions, information about specific borrower situations, and other factors, future adjustments to reserves may become necessary, and net income could be significantly affected, if circumstances differ substantially from assumptions used with respect to such factors.

Exposure to Local Economic Conditions. The Bank’s primary market area for deposits and loans encompasses Lake County, in northwest Indiana, where all of its offices are located. Ninety-five percent of the Bank’s business activities are within this area. This concentration exposes the Bank to risks resulting from changes in the local economy. An economic slowdown in these areas could have the following consequences, any of which could hurt our business:

	•		Loan delinquencies may increase;

	•		Problem assets and foreclosures may increase;

	•		Demand for the products and services of the Bank may decline; and

	•		Collateral for loans made by the Bank, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans of the Bank.

Interest Rate Risk. The Bancorp’s earnings depend to a great extent upon the level of net interest income, which is the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings. Interest rate risk is the risk that the earnings and capital will be adversely affected by changes in interest rates. Further discussion of interest rate risk can be found under the caption “Asset/Liability Management and Market Risk” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this document.

Competition. The activities of the Bancorp and the Bank in the geographic market served involve competition with other banks as well as with other financial institutions and enterprises, many of which have substantially greater resources than those available to the Bancorp. Particularly intense competition exists for sources of funds, including savings and retail time deposits, and for loans, deposits and other services that the Bank offers. As a result of the repeal of the Glass Steagall Act, which separated the commercial and investment banking industries, all banking organizations face increasing competition.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of the Bank’s eight banking locations. The Bancorp owns all of its office properties.

The table on the following page sets forth additional information with respect to the Bank’s offices as of December 31, 2006. Net book value and total investment figures are for land, buildings, furniture and fixtures.


	Year				Approximate
	facility		Net book		square		Total
Office location	opened		value		footage		cost
9204 Columbia Avenue
Munster, IN 46321		1985	$	1,272,770		11,640	$	3,115,751
141 W. Lincoln Highway
Schererville, IN 46375		1990		958,562		9,444		2,668,322
7120 Indianapolis Blvd.
Hammond, IN 46324		1978		248,833		2,600		886,103
1300 Sheffield
Dyer, IN 46311		1976		181,351		2,100		812,498
7915 Taft
Merrillville, IN 46410		1968		77,385		2,750		587,340
8600 Broadway
Merrillville, IN 46410		1996		1,458,868		4,400		2,576,323
4901 Indianapolis Blvd.
East Chicago, IN 46312		1995		854,535		4,300		1,490,454
1501 Lake Park Avenue
Hobart, IN 46342		2000		1,843,069		6,992		2,591,978
9204 Columbia Avenue
Building B
Munster, IN 46321		2003		6,552,489		36,685		8,818,864

At December 31, 2006, the Bank had investments totaling $1,159,267 in three locations, which have been acquired for future development. The Bank outsources its core processing activities to Metavante Corporation located in Brown Deer, Wisconsin. Metavante provides real time services for loans, deposits, retail delivery systems, card solutions, and electronic banking. Additionally, the Bank utilizes Northern Trust in Chicago, Illinois for its wealth management operations.

The net book value of the Bank’s property, premises and equipment totaled $14.6 million at December 31, 2006.

Item 3. Legal Proceedings

The Bancorp is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Bank is a party to legal proceedings incident to its business, including foreclosures.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2006.

Item 4.5 Executive Officers of the Bancorp

Pursuant to General Instruction G(3) of Form 10-K, the following information is included as an unnumbered item in this Part I in lieu of being included in the Bancorp’s Proxy Statement for the 2006 Annual Meeting of Shareholders:

The executive officers of the Bancorp are as follows:


	Age at
	December 31,
	2006	Position
David A. Bochnowski	61	Chairman and Chief Executive Officer
Joel Gorelick	59	President and Chief Administrative Officer
Jon E. DeGuilio	51	Executive Vice President and Secretary
Robert T. Lowry	45	Senior Vice President, Chief Financial Officer and Treasurer

The following is a description of the principal occupation and employment of the executive officers of the Bancorp during at least the past five years:

David A. Bochnowski is Chairman and Chief Executive Officer of the Bancorp and the Bank. Mr. Bochnowski is responsible for the Bank’s strategic direction including a focus on enhancing brand awareness and market share, as well as risk management. He has been the Chief Executive Officer since 1981 and became the Chairman in 1995. He has been a director since 1977 and was the Bank’s legal counsel from 1977 to 1981. Mr. Bochnowski is a past Chairman of America’s Community Bankers (ACB), a national trade association for community banks. He is a trustee of the Munster Community Hospital, chairman of the Gary Citywide Community Development Corporation, and chairman of the Legacy Foundation of Lake County. He is a former Chairman of the Indiana Department of Financial Institutions; former chairman of the Indiana League of Savings Institutions, now known as the Indiana Bankers Association; former director of the Federal Home Loan Bank of Indianapolis; and, a former member of the Federal Reserve Thrift Institutions Advisory Committee. Before joining the Bank, Mr. Bochnowski was an attorney, self-employed in private practice. He holds a Juris Doctorate degree from Georgetown University and a Masters Degree from Howard University.

Joel Gorelick is President and Chief Administrative Officer of the Bancorp and the Bank. Mr. Gorelick has responsibility for daily activities including asset formation, funds acquisition, operations and information technology, financial reporting and controls, and trust activities. Mr. Gorelick has been with the Bank since 1983. He became a director in 2000. Mr. Gorelick is involved in many community service organizations and has served in positions such as president of the Northwest Indiana Boys & Girls Club, chairman of the board of the Northwest Indiana Regional Development Corporation and President of the Lake Central High School Athletics Booster Club. Mr. Gorelick received recognition as the Small Business Advocate for 1999 at the Northwest Indiana Entrepreneurial Excellence awards program and was named the 2000 board member of the year by the National Association For Development Companies. The Indiana District Office of the U. S. Small Business Administration named Mr. Gorelick the year 2000 Financial Services Advocate. Mr. Gorelick has been appointed as a board member for the United States Selective Service System and currently serves as President of the Lake County Economic Development Corporation. He holds a Masters of Science in Business Administration from Indiana University and is a graduate of the Graduate School of Banking at the University of Wisconsin at Madison.

Jon E. DeGuilio is Executive Vice President and Secretary for the Bancorp and Executive Vice President, Stakeholders Services Group and General Counsel, Corporate Secretary, for the Bank. Mr. DeGuilio assumed his current responsibilities with the Bank and Bancorp during 2001. He joined the Bank in December of 1999 as Senior Vice President and Trust Officer. He holds a Juris Doctorate degree from the Valparaiso University School of Law and a Bachelor of Arts degree from the University of Notre Dame. Prior to his employment with the Bancorp, Mr. DeGuilio was a partner with the law firm of Barnes and Thornburg and served as the United States Attorney for the Northern District of Indiana from November of 1993 until June of 1999. Mr. DeGuilio is actively involved in community service as a Court Appointed Special Advocate (CASA) for the Lake County Juvenile Court, as well as serving on the board of directors of the “Friends Of The Lake County CASA” and also serves on the board of directors of the Lake County Drug Free Alliance.

Robert T. Lowry is Senior Vice President, Chief Financial Officer and Treasurer of the Bancorp and the Bank. He is responsible for finance, accounting, and financial reporting activities. Mr. Lowry has been with the Bank since 1985 and has previously served as the Bank’s assistant controller, internal auditor and controller. Mr. Lowry is a Certified Public Accountant (CPA). Mr. Lowry holds a Masters of Business Administration Degree from Indiana University and is a graduate of America’s Community Bankers National School of Banking. Mr. Lowry is a member of the American Institute of Certified Public Accountants, the Indiana CPA Society, the Financial Managers Society and America’s Community Bankers Accounting Issues Committee.

PART II


Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The information contained under the caption “Market Information” in the 2006 Annual Report to Shareholders is incorporated herein by reference. Also see Item 12 of this Annual Report on Form 10-K.


Item 6.		Selected Financial Data

The information contained in the table captioned “Selected Consolidated Financial Data” in the 2006 Annual Report to Shareholders is incorporated herein by reference.


Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2006 Annual Report to Shareholders is incorporated herein by reference.


Item 7A.		Quantitative and Qualitative Disclosures About Market Risk

The information contained in the section captioned “Asset/Liability Management and Market Risk” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the 2006 Annual Report to Shareholders is incorporated herein by reference.


Item 8.		Financial Statements and Supplementary Data

The financial statements contained in the 2006 Annual Report to Shareholders, which are listed under Item 15 herein, are incorporated herein by reference.


Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There are no items reportable under this item.


Item 9A.		Controls and Procedures

(a)

Disclosure Controls and Procedures.

The Bancorp maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (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 management, with the participation of its principal executive officer and principal financial officer, evaluates the effectiveness of the Bancorp’s disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of December 31, 2006, the Bancorp’s principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of that date.

(b)

Changes in Internal Control Over Financial Reporting.

There was no change in the Bancorp’s internal control over financial reporting that occurred during the quarter ended December 31, 2006, that has materially affected, or is reasonably likely to materially affect, the Bancorp’s internal control over financial reporting.


Item 9B.		Other Information

There are no items reportable under this item.

PART III


Item 10.		Directors and Executive Officers of the Registrant

The information contained under the sections captioned “Election of Directors—Nominees” and “—Meetings and Committees of the Board of Directors,” “Security Ownership by Certain Beneficial Owners and Management -— Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics” in the Bancorp’s definitive Proxy Statement for the 2006 Annual Meeting of Shareholders is incorporated herein by reference. Information regarding the Bancorp’s executive officers is included under Item 4.5 captioned “Executive Officers of the Bancorp” at the end of Part I hereof and is incorporated herein by reference, in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.


Item 11.		Executive Compensation

The information contained under the section captioned “Compensation of and Transactions with Officers and Directors” in the Bancorp’s definitive Proxy Statement for its 2007 Annual Meeting of Shareholders is incorporated herein by reference.


Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information contained within the Bancorp’s definitive Proxy Statement for the 2007 Annual Meeting of Shareholders, under the sections captioned “Security Ownership by Certain Beneficial Owners and Management”, on page 3, “Outstanding Equity Awards at December 31, 2006”, under the section captioned “Executive Compensation”, on page 16 and on pages 4-5 of the section captioned “Election of Directors” is incorporated herein by reference.


Item 13.		Certain Relationships and Related Transactions

The information contained on page 13 of the “Summary Compensation Table for 2006”, contained under the section titled “Executive Compensation” in the Bancorp’s definitive Proxy Statement for its 2007 Annual Meeting of Shareholders, is incorporated herein by reference.


Item 14.		Principal Accountant Fees and Services

The information contained under the section captioned “Independent Registered Public Accounting Firm’s Services and Fees” in the Bancorp’s definitive Proxy Statement for its 2007 Annual Meeting of Shareholders, is incorporated herein by reference.

PART IV


Item 15.		Exhibits and Financial Statement Schedules

(a)(1) Financial Statements:

The following financial statements of the Bancorp are incorporated herein by reference to the 2006 Annual Report to Shareholders, filed as Exhibit 13 to this report:

	(a)		Report of Independent Registered Public Accounting Firm

	(b)		Consolidated Balance Sheets, December 31, 2006 and 2005

	(c)		Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004

	(d)		Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004

	(e)		Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

	(f)		Notes to Consolidated Financial Statements

All other financial statements, schedules and historical financial information have been omitted as the subject matter is not required, not present or not present in amounts sufficient to require submission.

(3) Exhibits:


Exhibit
Number		Description
2.		Plan of Conversion of Peoples Bank, A Federal Savings Bank, dated December 18, 1993 (incorporated herein by reference to Exhibit A to the Bancorp’s Definitive Proxy Statement/Prospectus dated March 23, 1994, as filed pursuant to Rule 424(b) under the 1933 Act on March 28, 1994).

3.i.		Articles of Incorporation (incorporated herein by reference to Exhibit 3(i) to the Bancorp’s Registration Statement on Form S-4 filed March 3, 1994 (File No. 33-76038)).

3.ii.		By-Laws (incorporated herein by reference to Exhibit 3(i) to the Bancorp’s Registration Statement on Form S-4 filed March 3, 1994 (File No. 33-76038)).

3.iii.		Amendment of By-Laws adopted July 27, 1994(incorporated herein by reference to Exhibit 3.iii to the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 1994).

3.iv.		Amendment of By-Laws adopted January 21, 1999(incorporated herein by reference to Exhibit 3.iv. to the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 1998).

3.v.		Amendment of By-Laws adopted September 21, 2000.


Exhibit
Number		Description
3.vi.		Amendment of By-Laws adopted February 23, 2006 (incorporated herein by reference to Exhibit 3.1 of Bancorp’s Form 8-K dated February 27, 2006).

10.1. *		1994 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit A to the Bancorp’s Definitive Proxy Statement/Prospectus dated March 23, 1994, as filed pursuant to Rule 424(b) under the 1933 Act on March 28, 1994).

10.2. *		Employment Agreement, dated April 19, 2006, among NorthWest Indiana Bancorp, Peoples Bank SB and David A. Bochnowski (incorporated herein by reference to Exhibit 10.1 of the Bancorp’s Form 8-K dated April 19, 2006).

10.3. *		Employment Agreement dated July 20, 2006, between Peoples Bank SB and Joel Gorelick (incorporated herein by reference to Exhibit 10.1 of the Bancorp’s Form 8-K dated July 20, 2006).

10.4. *		Employee Stock Ownership Plan of Peoples Bank(incorporated herein by reference to Exhibit 10.4 to the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 1994).

10.5. *		Unqualified Deferred Compensation Plan for the Directors of Peoples Bank effective January 1, 2005.

10.6. *		Amended and Restated 2004 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 99.1 of the Bancorp’s Form 8-K dated April 20, 2005).

10.7. *		Amended and Restated 2004 Stock Option and Incentive Plan (incorporated herein by reference to Appendix A to the Bancorp’s Definitive Proxy Statement for its 2005 Annual Meeting of Shareholders, filed on March 25, 2005).

10.8. *		Post 2004 Unfunded Deferred Compensation Plan for the Directors of Peoples Bank SB effective January 1, 2005.

10.9. *		Form of Incentive Stock Option Agreement is incorporated by reference to Exhibit 99.2 of the Bancorp’s Form 8-K dated April 20, 2005.

10.10. *		Form of Non-Qualified Stock Option Agreement is incorporated by reference to Exhibit 99.3 of the Bancorp’s Form 8-K dated April 20, 2005.

10.11. *		Form of Agreement for Restricted Stock is incorporated by referenced to Exhibit 99.4 of the Bancorp’s form 8-K dated April 20,2005.

10.12. *		Summary Sheet of Director and Officer Compensation.

13.		2006 Annual Report to Shareholders

21.		Subsidiaries of the Bancorp

23.		Consent of Independent Registered Public Accounting Firm

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	NORTHWEST INDIANA BANCORP
	By	/s/	David A. Bochnowski
		David A. Bochnowski
Date: March 23, 2007		Chairman of the Board and
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 23, 2007:


Signature		Title

Principal Executive Officer:

/s/ David A. Bochnowski		Chairman of the Board and Chief Executive Officer
David A. Bochnowski

Principal Financial Officer and Principal Accounting Officer:

/s/ Robert T. Lowry Robert T. Lowry		Senior Vice President, Chief Financial Officer and Treasurer

The Board of Directors:

/s/ Frank J. Bochnowski Frank J. Bochnowski		Director

/s/ Leroy F. Cataldi Leroy F. Cataldi		Director

/s/ Lourdes M. Dennison Lourdes M. Dennison		Director

/s/ Edward J. Furticella Edward J. Furticella		Director

/s/ Joel Gorelick Joel Gorelick		Director


	Year ended December 31,
	2006			2005			2004
Return on average assets		1.04	%		1.14	%		1.17	%
Return on average equity		13.42			14.67			14.64
Average equity-to-average assets ratio		7.76			7.75			8.01
Dividend payout ratio		60.41			55.09			54.57


	At December 31,
	2006			2005			2004
Total stockholders’ equity to total assets		8.08	%		7.40	%		7.91	%
for the periods indicated:


*		- The indicated exhibit is a management contract, compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K.


Signature		Title

/s/ Kenneth V. Krupinski Kenneth V. Krupinski		Director

/s/ Stanley E. Mize Stanley E. Mize		Director

/s/ Anthony M. Puntillo Anthony M. Puntillo		Director

/s/ James L. Wieser James L. Wieser		Director

/s/ Donald P. Fesko Donald P. Fesko		Director


Exhibit		Description
10.5		Unqualified Deferred Compensation Plan for the Directors of Peoples Bank effective January 1, 2005.

10.8		Post 2004 Unfunded Deferred Compensation Plan for the Directors of Peoples Bank SB

10.12		Summary Sheet of Director and Officer Compensation

13.		2006 Annual Report to Shareholders

21.		Subsidiaries of the Bancorp

23.		Consent of Independent Registered Public Accounting Firm

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

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32		Section 1350 Certifications